Canadian businesses continue to face financial stress.
According to the latest data from Equifax Canada’s Market Pulse Q1 2024 Business Credit Trends Report, new installment loan originations surged by 74 per cent year-over-year in the second half of 2023. Businesses that raced to meet the Canada Emergency Business Account (CEBA) forgiveness deadline of January 18 could potentially be driving this higher-than-seasonal demand, it said.
Equifax said the uptick in delinquencies, notably observed from April 2022 to April 2024, parallels the implementation of interest rate hikes beginning in March 2022. A noticeable shift occurred in this period, with the percentage of companies experiencing at least one delinquency rising from 4.3 per cent to 4.9 per cent.
Sinead Gleason, Product Lead, Commercial Line of Business for Equifax, said the report highlighted the increase in delinquencies and bankruptcies which was pretty significant.
She said with the CEBA loan repayment deadline more businesses were taking out more installment loans.
“And balances have just been growing on financial trade balances, nearly $32 billion,” added Gleason.
“The cost of doing business has been steadily increasing and it impacts consumer spending, it impacts their inputs, their raw material inputs, and of course it’s been more expensive debt-wise in terms of interest rates. So businesses are taking on a heavier debt load and the economic environment is just not as strong as it was. So it’s a lot of pressure and we’re definitely seeing that in terms of missed payments.”
“While it may feel like CEBA is moving into the rear-view mirror, it’s truly a matter of businesses turning to new installment loans to secure their financial stability,” added Jeff Brown, Head of Commercial Solutions for Equifax Canada. “Many businesses were focused on the forgiveness deadline and paying back debt to take advantage of this timeline. The increased reliance on these loans has also contributed to a notable rise in delinquencies, particularly in installment loans.”
The Equifax report said industrial trades (credit accounts between businesses and suppliers) have seen a significant increase in 30+ day delinquencies, rising from 10.1 per cent in Q1 2023 to 12.2 per cent in Q1 2024. Similarly, financial trades (credit accounts between businesses and financial institutions) have also experienced an increase in delinquency rates, with 30+ day delinquencies rising from 3.3 per cent in Q1 2023 to 3.4 per cent in Q1 2024.
It said financial trade delinquencies are primarily being driven by missed payments on installment loans and lines of credit where 30+ delinquency rates have risen from 2.4 per cent and 3.3 per cent in Q1 2023 to 2.7 per cent (up 24.8%) and 3.9 per cent (up 19.1%) in Q1 2024 respectively. Overall credit card delinquencies remained low. However, businesses that have opened new credit cards over the last two years are missing payments at a much faster rate on those cards, which may impact delinquency levels later in 2024.
Delinquencies on asset-based loans are at some of the highest rates seen in the last 20 years, driven largely by the transportation and retail industries.
“The rise in missed payments strongly deviates from what would be expected, and may be cause for long-term concern. The asset-based loans include equipment leases that traditionally have lower-than-average delinquency. This makes sense because if, for example, you’re running a pizza restaurant, you don’t go delinquent on the lease of your pizza oven or if you’re a trucking company you won’t want to go delinquent on your trucks either — because if you do, it’s game over for your business,” said Brown.
Gleason said with interest rates going down it’s a positive move but she’s not sure it’s going to make a measurable, meaningful impact in the short term.
“I think it’s going to take another quarter or two and we’re probably going to see that strain carrying. I don’t know if it’s going to be to the same degree. Hopefully not.”
But Gleason said a hopeful trend is the number of new businesses setting up shop in Canada today.
On top of the challenge of rising delinquencies, Canadian businesses are struggling under the weight of rising debt, with outstanding financial trade balances hitting a new high of $31.9 billion in Q1 2024 — a 7.4 per cent increase from last year, said Equifax.
“The recent rate cut by the Bank of Canada offers hope that we could be on a trend towards lower rates if inflation remains in check,” said Brown. “Businesses may get some breathing room on debt payments, which could potentially free up resources for growth.”
Equifax said inquiry volumes for financing during the first quarter of 2024 jumped 2.4 per cent year-over-year, reflecting strong demand from businesses. While access to credit may be uneven with lower-risk borrowers receiving a larger share of new trades, there are positive trends emerging. More than 53,000 businesses have opened in Q1 2024, up 30 per cent from Q1 2023.
The industrial sector saw a 6.5 per cent rise in new originations in 2023 compared to 2022. Financial trades also increased with a 3.4 per cent increase in the last quarter and a significant 14.4 per cent jump year-over-year.
“These figures paint a promising picture for future economic activity, despite some adaptations in the lending environment,” explained Brown.
