Opinion: Canadian businesses are in debt distress with many facing delinquency

You’d wish it were different, but the scene isn’t pretty for Canadian businesses and their capacity to contend with their debts.

New data reveal a rising delinquency rate as more businesses miss credit payments, and the stress is quite profound in key sectors like construction, retail and transportation.

Their woes should worry us, for as they go, so can we see better into the economy’s flight path. In general they’re lagging indicators in portraying existing problems, but they can also portend unemployment.

When businesses miss a credit payment, it is clear they’ve entered a zone leading to considerable consequence—of cash-flow and operational problems, strained supplier relations that can further tighten the screws on credit, a hit to credit scores and borrowing terms, and late fees that morph into eventual legal action.

In the second quarter of 2024, Equifax Canada’s insightful report on business credit trends noted more than 56,000 Canadian businesses had missed at least one financial “trade,” up 10.2 per cent from the same period in 2023.

Missing one payment is a problem, but missing more of them can mean much more. The 60-day delinquency rate in the trailing 12 months rose to 3.1 per cent, up from 2.8 per cent, mostly due to loan arrears, reflecting the last-minute rush to take loans to pay down government pandemic loans. When you’re taking a loan to pay a loan, you’re not on fabulous footing.

Delinquency in industrial trades rose to 5.7 per cent in the second quarter of this year, up from 5.1 per cent a year earlier. And quite troublesome are findings that new businesses are starting to miss more payments, even if below the national average.

Jeff Brown, Equifax’s head of commercial solutions in Canada, notes the particular pain point of forest fires on Western Canadian business. “The economic impact of natural disasters, inflation, and fluctuating interest rates have created a challenging environment for businesses to navigate,” he says.

This is an acute issue for small business. In B.C. and Alberta delinquency rates are higher than the national average; the two provinces lead the country, in a bad way. “Recovery will take a long time and insurance only goes so far,” he said. And while Alberta is attracting people, B.C. is witnessing a population flight.

Equifax notes the difficult mix of high interest rates, high input costs and the “harsh necessity” for businesses to rely on credit cards and lines to stay afloat. While those rates are coming down slightly, and are bound to continue, what businesses find in their wake are worrying conditions to conduct successfully.

To wit: Retailers are likely to push holiday sales ahead to boost revenues, and many are in a “weakened position,” yet they may find consumer spending has slowed because of their own personal credit challenges, the knock-on effects of inflation and higher unemployment. It’s not as if retailers are in great shape—their 60-day delinquencies were 4.2 per cent in the second quarter, up from 3.7 per cent a year ago.

The transportation sector leads industries in delinquencies, with nearly 4.3 per cent of them missing payments for more than 60 days. Compare that to five years ago, when the rate was 0.93 per cent.

Arguably the data of most serious concern involves the construction industry so crucial to the national need for housing supply. The rate of 60-day-plus delinquency in financial trades rose to 3.3 per cent in the second quarter, up from 2.9 per cent. Asset-based loan delinquencies more than doubled over the course of the year. It can mean something large like a supply of concrete or lumber, or something simple like not being able to make payments on a bulldozer or a pick-up truck, Brown says.

The national totals are eye-popping: $33.8 billion in outstanding balances in the second quarter, up 12.2 per cent from a year earlier.

There is a slight silver lining in these clouds: insolvency totals are in decline, down 23. 1 per cent in the second quarter over the first quarter. Even so, they were 41.3 per cent higher than they were a year earlier.

Equifax shares the common view that lower interest rates may boost economic activity before long, but observes that the “conservative pace of these reductions may have left businesses and consumers hesitant to make significant investments.”

No wonder that, with provincial and federal elections looming, politicians and candidates are hearing that affordability tops our concerns as a country.

Kirk LaPointe is a Glacier Media columnist with an extensive background in journalism.