New report sheds light on "concerning" trends
Surging debt levels have been a noteworthy economic trend in Canada recent years – and a new report suggests businesses across the country are increasing their credit usage at a rapid rate, adding further stress to an already highly-leveraged Canadian economy.
The latest iteration of credit reporting agency Equifax’s Canada Market Pulse Business Credit Trends Report, released for 2023’s first quarter, shows that the balance on bank-issued installment loans across the country sat at $12.9 billion at the end of that period, with credit card balances swelling by 15% and lines of credit up 11%.
That could prove worrisome for the national economy, Equifax’s head of commercial solutions Jeff Brown (pictured) told Canadian Mortgage Professional, if it persists as a longer-term trend with potential further economic volatility ahead.
“It’s a concerning trend if it continues on,” he said. “You don’t want to be kicking the can down the road. Credit card usage is great – it’s there for a purpose, for individual transactions. But the problem really arises when you have companies using it to basically carry a debt load.
“So the revolving debt month to month is going to have a cascading impact because there are so many headwinds in terms of interest rates, inflation that can really mount up on them.”
How are Bank of Canada rate hikes impacting businesses’ debt levels?
Interest rates have spiked over the past 15 months amidst a series of Bank of Canada hikes aimed at tamping down inflation and cooling the economy, a trend that Equifax said may have seen borrowers shift towards credit products without fixed repayment periods.
Installment loan balances increased by more than 35% compared to 2020, the report indicated, and Brown also flagged the risks posed by looming repayment requirements on government loans.
“We’re seeing really low numbers in the payback rates of [government loans] as well,” he said. “So imagine if a small business is carrying a debt load on a credit card and has not even started paying off that $40,000 to $50,000 debt with the government as that starts to accrue interest at the end of this year – there’s just a mounting debt load that’s on its way for Canadian small businesses.
“So we’re hoping this is just a temporary sign that we’re seeing with credit card usage, but if it continues it’s going to be something that’s almost insurmountable.”
In the opening quarter of the past two years, the number of business establishments opening in Canada has ticked resolutely upwards – but in 2023, the pace of new business openings slowed, with Ontario, British Columbia, and Alberta each posting big declines.
“During the pandemic, we saw ebbs and flows happen,” Brown said. “But what’s really concerning is we’re not even hitting the levels that we did last year with new business growth. Really, we’re not seeing the small business numbers that we’d like to see. So for large corporations who invoice tens if not hundreds of thousands of small businesses, they rely on those as well.”
Important not to get weighed down by unfounded optimism, executive suggests
Considerable optimism remains among small businesses throughout Canada in spite of the economic challenges, although Brown cautioned against not preparing adequately for the hurdles that could be coming down the line in the bumpy post-pandemic economy.
Repayments are supposed to be made on the government’s pandemic loan program, a $50 million initiative to help businesses deal with the impact of the COVID-19 shutdown, six months from now.
“While there’s a lot of bad news circulating around debts [and] managing credit right now, small businesses still remain optimistic,” Brown said. “We just hope that’s not a false reality, that they’re just holding out hope for interest rates to go down – that this optimism isn’t this false hope.
“There aren’t any other bailouts coming. The Canadian government’s been very clear that these loans that were tied to the pandemic aren’t bailouts, these are in fact loans, so we’re hoping that this becomes really settled in to small businesses because it’s now time to start understanding your debt and paying it down before it continues.”
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