Insolvencies and delinquencies surge for Canadian businesses

By Isaac Lamoureux

Insolvencies and delinquencies are on the rise for Canadian businesses and may continue to worsen with loans struggling to be repaid, according to new data from Equifax Canada.

A press release highlighting 2023’s fourth-quarter business credit trends revealed that business insolvencies increased 41.4% between 2023 and 2022.

Simon Gaudreault, chief economist and vice-president of research at the Canadian Federation of Independent Business, told True North that the uptick of bankruptcies is “just the tip of the iceberg.”

The CFIB surveyed its members a few years ago, and only roughly 10% of those considering closing their business said they would officially file for bankruptcy. The rest would sell the assets, transfer the business, or utilize other means outside of a full bankruptcy process.

A significant contributor to this surge is the repayment of Canada Emergency Business Account loans, according to Equifax Canada. 

On January 19, 2024, CEBA loans converted from interest-free with no monthly payments to a three-year term loan with 5% interest payable annually. 

“With the deadline for CEBA loan repayments now passed, many businesses find themselves navigating the financial strain of monthly payments accompanied by a higher interest rate,” said Equifax Canada.

CEBA loans initially offered interest-free loans up to $40,000 to small businesses and not-for-profits. The amount was increased to $60,000 on December 4, 2020. Loan holders who initially received the $40,000 loan could apply for an expansion and receive an additional $20,000.

For loans repaid by January 18, 2024, the government offered forgiveness for up to 33% or $20,000 of the maximum $60,000 loan. 

Jeff Brown, Head of Commercial Solutions for Equifax Canada, said that “Canadian businesses are facing a perfect storm of economic pressures.”

“The end of the initial grace period of CEBA loans, combined with high input costs, labour expenses, a slowdown in consumer spending and high-interest rates, is creating a challenging environment,” he added. 

Approximately 25% of the 898,271 CEBA loan recipients missed the deadline. The total funds provided for CEBA loans and expansions was $49.2 billion.

The government’s decision not to extend the CEBA deadline was “the straw that broke the camel’s back,” according to Gaudreault. 

While CEBA was a contributing factor, other contributors to business closures were lost revenue from public health closures, supply chain challenges, inflation, increased costs, rising interest rates, and labour shortages, according to Gaudreault.

Business credit account delinquencies have risen substantially, highlighted the report.

Industrial trade experienced an 8.8% increase in 30+ day account-level delinquencies. Financial trades saw an increase of 3.1%.

Installment loan delinquencies saw a similar surge. Early-stage delinquencies rose 12.5% and late-stage delinquencies rose 16.3% year-over-year. Equifax Canada said that this was due to businesses struggling with monthly loan payments. 

The Canadian Association of Insolvency and Restructuring Professionals issued a press release in February highlighting the Canadian insolvency statistics.

“Some businesses may  not be able to manage the increases to their monthly bills, especially if they are already finding it difficult to drum up sales. That strain, combined with any additional financial challenges or setbacks this year could force businesses to shutter,” said André Bolduc, Chair of the association.

Statistics Canada’s most recent data shows 42,335 businesses closed in November 2023.

The Canadian Federation of Independent Business surveyed its members in February, asking about the top concerns facing small businesses.

Financial situation of the business—cash flow, debt, etc.—led the pack at 20%. This concern was followed by labour shortages at 17%, taxes at 13%, operational costs, labour costs, and government red tape at 9%, 8%, and 7%, respectively, followed by a variety of other less common issues.

Gaudreault said the government can help small businesses in various ways, but cutting the upcoming carbon tax hike on April 1 would be the easiest way.

He feels that the carbon tax is unfair towards small businesses.

“A lot of the revenues from the tax come from small businesses, but they get a very small share in return.”

While 2023 was challenging, Gaudreault says he remains optimistic that 2024 could see signs of improvement. However, he added that Canada’s labour shortages and ageing population remain significant concerns.

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