Businesses lean on revolving credit amidst rising financial stress

There is a pattern of credit expansion and a significant shift in credit usage by Canadian businesses, indicating they are facing potential challenges, says the ‘Equifax Canada Market Pulse Business Credit Trends Report’ for the first quarter of 2023. The total outstanding balance on bank-issued installment loans in Canada decreased 2.4% in the first quarter compared to the same period last year. By contrast, during the same period, credit card balances grew by 15% and lines of credit showed an 11% increase. “The decline in installment loans and the shift towards credit card usage could be impeding their growth potential and hindering their ability to make larger investments,” says Jeff Brown, head of commercial solutions at Equifax Canada. Of particular significance in the report is the decline in loan balances, considering that installment loan balances grew by more than 35% compared to 2020. This suggests that borrowers could increasingly gravitate towards credit products that don’t lock them into fixed repayment periods and offer greater flexibility in terms of interest rates. The recent hikes in interest rates by the Bank of Canada may have contributed to this shifting trend. Additionally, the report notes that there was a slowdown in new business openings in the first quarter, which is a deviation from the previous growth trajectory. For the past two years, the months of January, February, and March showed a consistent month-over-month increase in business establishments as the economy began to recover from the impacts of the pandemic. However, in 2023, there has been a noticeable dip in new business starts at the start of the year. As of the end of February, new business starts are down year-over-year by 16.5% in Ontario, 14.2% in British Columbia, 11.4% in Alberta, and 7.5% in Quebec. Interestingly, despite the challenges posed by rising interest rates and high inflation, 73.5 per cent of businesses are optimistic about their future over the next 12 months.