Business insolvencies spiked 41% in Q4 coupled with economic challenges
Punishing interest rates, looming federal pandemic loan repayments and shifting market conditions have led to a “perfect storm” of economic challenges for Canadian small businesses — and a skyrocketing insolvency rate to go along with it.
In a report released Tuesday, Equifax Canada reported a 41.4 per cent spike in business insolvencies in the fourth-quarter of 2023, compared to the year prior. In that same period there was also a 14.3 per cent rise in the number of businesses that missed a payment on a credit product.
“The fact that it’s up 41.4% over the past year, is a lot,” said Jeff Brown, head of commercial solutions for the consumer credit reporting agency. “We haven’t seen any numbers like this in recent memory, so we’re not going anywhere positive for small businesses at the moment. It’s a very challenging time.”
A significant factor to the mounting stress, said Brown, is the repayment of Canada Emergency Business Account (CEBA) loans. With the deadline for loan repayment over, Brown said many businesses find themselves struggling with monthly payments accompanied by a higher interest rate — a stark contrast to the initial terms of interest-free and no monthly payments.
“Canadian businesses are facing a perfect storm of economic pressures,” Brown said in a press release. “The end of the initial grace period for CEBA loans, combined with high input costs, labour expenses, a slowdown in consumer spending and high interest rates, is creating a challenging environment.
“These factors are contributing to a growing trend of business failures,” continued Brown. “The sharp rise in insolvencies, representing a 30.3 per cent surge since 2019, underscores the financial pressures faced by businesses. There is a need to manage debt and adapt to changing market conditions through strategic financial planning and proactive measures.”
The rapid increase of insolvencies across Canada was one of the bigger surprises coming out of Equifax’s Q4 report, said Brown, adding that the spike came even before CEBA loans were due.
The CEBA program allowed eligible small businesses and not-for-profits to receive interest-free loans of up to $60,000 during the pandemic, with $20,000 of it in forgivable debt — if they met the payback deadline.
Despite extending the deadline twice many business are now navigating the burden of monthly payments.
“It’s like adding another car payment without getting a car,” Brown said. “It’s challenging times for (businesses) who’ve taken on this extra debt that was meant to get them through the pandemic, and now it’s something that they’re sitting with for the next three years.
The report also found that businesses are struggling to keep up with monthly loan repayments, as instalment loan delinquencies, the amount of debt that is past due, in the early and late stages have spiked by 12.5 per cent and 16.3 per cent year over year.
Challenges facing current business owners, haven’t deterred those seeking to open a place of their own, as the report found new businesses are still applying for credit. In fact, they hold a slight advantage, Brown said, as they don’t have “that extra debt that’s weighing against them, in comparison to businesses that have been around for a while.”
However, with high interest rates and stricter criteria for borrowing money from banks, there has been an increase in applications that are not being turned into funded loans, he added.
“It might be that a lot of businesses are testing the waters to see ‘what can I get approved for?’” Brown said. “At the same time, it’s a bit of a sign that some banks are starting to tighten their belts a little bit on their credit policies, because they want to make sure that small businesses can last through difficult times as well.”
But Brown said not everything is doom and gloom going forward.
“The silver lining to it is we’re starting to get into the spring and summer season,” he added, “which is notoriously very strong for businesses.”
This article was first reported by The Star
