According to the latest data from Equifax Canada’s Market Pulse Q1/24 Business Credit Trends Report, new installment loan originations surged by 74% 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, 2024 could potentially be driving this higher-than-seasonal demand.

“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,” Jeff Brown, head of commercial solutions for Equifax Canada, said. “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.”

Financial Stress Continues for Businesses

The uptick in delinquencies, notably observed from April 2022 to April 2024, parallels the implementation of interest rate hikes commencing in March 2022. A noticeable shift occurred in this period, with the percentage of companies experiencing at least one delinquency rising from 4.3% to 4.9%.

Industrial trades (credit accounts between businesses and suppliers) have seen a significant increase in 30+ day delinquencies, rising from 10.1% in Q1/23 to 12.2% in Q1/24. 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% in Q1/23 to 3.4% in Q1/24. 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% and 3.3% in Q1/23 to 2.7% (up 24.8%) and 3.9% (up 19.1%) in Q1/24, 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.

“It is more important than ever to monitor newer accounts for early warning signs of financial stress as it might take some time to see their impact on portfolios,” Brown said.

Delinquencies in Transportation and Retail at Record High Levels

Delinquencies on asset-based loans are at some of the highest rates seen in the last twenty 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,” Brown said. “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.”

Business Debt Up, but Rate Cut Will Offer Some Relief

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 Q1/24 — a 7.4 % increase from last year.

“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,” Brown said. “Businesses may get some breathing room on debt payments, which could potentially free up resources for growth.”

Rise in New Businesses, Strict Lending

Inquiry volumes for financing during the first quarter of 2024 jumped 2.4% 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 Q1/24, up 30 % from Q1/23.

The industrial sector saw a 6.5% rise in new originations in 2023 compared to 2022. Financial trades also increased with a 3.4% increase in the last quarter and a significant 14.4% jump year over year. “These figures paint a promising picture for future economic activity, despite some adaptations in the lending environment,” Brown said.