Canadian businesses missing payments as debt burden grows

A driver is climbing into a transport truck in a parking lot full of trailers near Highway 410 in Mississauga, Ontario, on May 31, 2024. (Photo by Mike Campbell/NurPhoto via Getty Images)

The total balance of loans and credit extended to Canadian businesses hit a new high of $31.9 billion in the first quarter of 2024. (Photo by Mike Campbell/NurPhoto via Getty Images) (NurPhoto via Getty Images)

Burdened by residual debt from federal pandemic loans, Canadian businesses are missing an increasing number of payments, with delinquency levels near record highs in the transportation and retail sectors, according to new data from Equifax Canada.

When the Canada Emergency Business Account (CEBA) loans came due in January, “we really saw a transition of small businesses going from those loans to instalment loans,” Jeff Brown, Equifax Canada’s head of commercial solutions, said in an interview with Yahoo Finance Canada.

“They went to their host banks to get a new loan to get some of the forgiveness of the CEBA loan and really just kicked the can down the road a little bit.”

According to Equifax’s Q1 2024 Business Credit Trends Report, the second half of 2023 saw new instalment loans jump by 74 per cent year-over-year. (The Canadian Federation of Independent Business says 200,000 small businesses took out loans to meet the January 18 deadline and qualify for forgiveness of up to 25 per cent of the CEBA debt.)

The total balance of loans and credit extended to Canadian businesses hit a new high of $31.9 billion in the first quarter of 2024, 7.4 per cent higher than the same period in 2023, per Equifax’s report. The increased debt load amid a difficult economic context helps explain an uptick in delinquencies, Brown says, and parallels a significant rise in insolvencies.

Delinquencies are up on various measures. 30+ day delinquencies on credit accounts between businesses and suppliers were up around 20 per cent year-over-year in Q1 2024, below 25 per cent for instalment loans and just over 19 per cent for lines of credit.

Brown says a particular concern is in retail and transportation, where missed payments on asset-based loans are at levels not seen for 20 years. “We think of things like restaurants that have pizza ovens or transportation companies that have vehicles,” Brown said. Delinquency rates on such payments tend to be very low “because if you can’t pay those down, it means you can’t operate your business,” he says.

“So, it’s a very difficult hole for those types of businesses to get out of because either they have to do something dramatic to be able to compensate” for the consequences of a missed payment, “or it’s right down that chute through that negative credit life cycle.”

Though the proportion of businesses falling behind is quite small — 4.9 per cent of companies were delinquent on at least one payment in April 2024, up from 4.3 per cent in April 2022, when interest rates had just begun to rise — slight increases in delinquency resonate across industries, Brown says.

“If your peers are not successful, the suppliers, the financial institutions that are incurring those write-offs or those credit challenges with other organizations, it will impact you because you’re going to have to compensate to be able to make them whole so they hit their quotas.”

A bright spot in the Equifax report is a jump in new businesses in an era where falling interest rates could also spell relief for existing firms. The report says more than 53,000 businesses opened in Q1 2024, a rise of 30 per cent over Q1 2023. Brown notes that businesses founded after the pandemic don’t have the historical burden of CEBA loans that older businesses may have — which he says is fuelling a “paradigm shift” in how banks approach business loans.

“The riskier businesses right now are the older ones,” Brown said. “So we’re going to see a lot of financial institutions change their risk modelling and how they assess risk in this current market and I think we’re going to see that a lot of the new businesses are the ones that are going to rise to the top and succeed for us.”

John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jmacf. Download the Yahoo Finance app, available for Apple and Android.


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