The Canadian small business landscape is facing a precarious situation as the government’s pandemic-era support measures come to an end, coinciding with a slowing economy and high interest rates. This convergence has put many small businesses at risk of bankruptcy, posing challenges for the broader economy.
Small businesses, defined as those employing fewer than 100 people, play a crucial role in Canada’s economy, providing jobs to nearly two-thirds of the country’s 12 million private workers. However, the sector is now grappling with a potential surge in bankruptcies, which spiked by 38% in the first 11 months of 2023, according to data from lobby groups and economists.
One of the key factors contributing to this risk is the recent deadline for small businesses to repay interest-free loans of up to C$60,000 ($44,676) each, which were provided during the pandemic. Despite efforts to support businesses, a significant portion have not been able to repay these loans on time. Finance Minister Chrystia Freeland revealed that approximately a fifth of the 900,000 loan recipients have not yet repaid their loans, with the Canadian Federation of Independent Businesses (CFIB) estimating that a quarter missed the deadline.
Katherine Cuplinskas, a spokesperson for the finance minister, stated that the Department of Finance does not anticipate a negative impact on the economy due to the loan repayments, emphasizing that businesses were well-informed about the repayment timelines.
According to the latest official data, there were about 1.2 million small businesses with employees in Canada in 2021, contributing over a third to the country’s gross domestic product (GDP). However, the challenges facing these businesses are significant, with Dan Kelly, CFIB president, warning that many viable businesses may struggle to repay their debts, potentially leading to insolvency. He noted that borrowing at higher interest rates from banks might be the only option for many businesses to repay their debts.
CFIB estimates that approximately 225,000 businesses took out bank loans to repay their pandemic-era loans, coinciding with a period of exceptionally high interest rates in Canada, reaching a 22-year high. For those who missed the deadline without securing a loan, they are required to make regular payments for two years at an annual interest rate of 5%.
Stephen Tapp, chief economist at the Chamber of Commerce, anticipates a rise in insolvencies over the next six months, reflecting the growing financial strain on small businesses. The Conference Board of Canada (CBC) projects a further decline in consumer spending per capita in 2024, exacerbating the challenges faced by businesses.
CBC also forecasts a significant drop in first-quarter corporate profits, nearly halving from a year ago to C$104.5 billion. The outlook for the rest of the year remains subdued, with companies grappling with higher costs and reduced sales.
Pedro Antunes, chief economist at CBC, likened the current situation to a revealing moment, quoting Warren Buffett: “When the tide goes out, you see who is swimming naked.” With government support receding, small businesses are increasingly exposed to financial vulnerabilities, highlighting the need for targeted support and strategies to navigate these challenging times.
(Source: Reuters | US News Money | CMP)
