Your under-pressure business clients may be turning to credit cards and lines of credit to stay afloat according to new stats
Many of Canada’s business owners continue to struggle with unprecedented challenges and economic uncertainty and many are taking risks to stay afloat.
A new report published today (June 20) by Equifax Canada warns of credit expansion and a significant shift in credit usage based on data from the first quarter of 2023.
Bank-issued installment loans actually posted a 2.4% year-over-year drop in total outstanding balance to $12.9 billion, the first annual decrease since the firm started tracking this in 2019, although installment loan balances are up more than 35% compared to 2020.
But credit card balances have jumped 15% and lines of credit balances are up 11% compared to the first three months of 2022.
This suggests that businesses may be pivoting towards lower commitment credit products as the Bank of Canada continues to increase interest rates.
But although this may allow for greater flexibility and avoid firms being locked into high interest rates over the medium term, this borrowing strategy is not without a downside.
“The decline in installment loans and the shift towards credit card usage could be impeding their growth potential and hindering their ability to make larger investments,” said Jeff Brown, Head of Commercial Solutions at Equifax Canada.
Financial stress
Some businesses are struggling more than others and the data shows an increase in delinquencies in industrial trades.
Late delinquencies are up 9% within a 60-day window annually and nearing pre-pandemic levels. Those businesses in BC and Alberta are driving this.
“The persistent rise in early delinquency rates in these trades suggests that businesses are struggling to meet their financial obligations,” explained Brown. “Typically, businesses prioritize paying their suppliers to maintain operations, but it is disturbing to see consecutive quarterly increases in delinquencies on the supplier side as well.”
Equifax Canada’s research reveals a slowdown in new business startups in the first three months of this year.
The beginning of the year has shown a spike in new businesses over the past few years but that trend was snapped this year with new business starts down year-over-year by 16.5% in Ontario, 14.2% in B.C., 11.4% in Alberta and 7.5% in Quebec.
Bright outlook?
However, despite all these challenges most (73.5%) Canadian businesses surveyed said they are optimistic about their future over the next 12 months.
“Equifax data also suggests some regional gains in the demand for commercial credit, which is a positive sign and speaks to the resilience and optimism of Canadian businesses,” Brown acknowledged. “However, it is essential to consider the potential consequences of the current credit landscape.”
