More small businesses need financing while interest rates soar

The share of small businesses seeking financing has surged in the last decade, says the Canadian Federation of Independent Business’ (CFIB) ‘Financing Main Street’ research series. Conversely, the cost of borrowing has gone up over the past three years, putting businesses at risk. 

In 2022, well over half (58%) of small businesses needed financing, compared to just over a third (35%) in 2012. The most common reason businesses applied for financing was simply to boost their cash flow (52%). Over a third (35%) did so to acquire physical assets and 25% to purchase inventory. 

The smaller the business, the likelier the rejection. Nearly all mid-sized firms (94%) were approved for financing while just three in four micro-businesses (77%) were approved. 

Smaller businesses are also the most likely to have to provide some form of personal guarantee, which puts them at personal financial risk if their business defaults on its loans. To be approved for financing, over one in two (52%) micro businesses had to make a personal guarantee, while over a quarter (29%) needed to pledge their primary residence as collateral. 

"Small businesses need access to financing, but it's harder and more expensive for them to do so. And when they can access it, they are typically asked to make a personal guarantee or put up personal collateral," says Taylor Matchett, CFIB senior research analyst and co-author of the report. "Financing institutions should consider whether personal collateral or guarantees are really necessary, and if there are alternate solutions, before requesting it from their small business clients." 

At the same time, smaller businesses face higher interest rates, paying an average of 2.1% above the prime rate. Since the Bank of Canada started raising its key interest rate to combat inflation, the share of small businesses struggling with borrowing costs has surged from 21% in January 2022 to 39% in May 2023. Businesses with variable financing are currently paying around 9.05% in interest annually, which means they are significantly impacted by increases in borrowing costs. 

Read CFIB’s recommendations for the government or the full ‘Small Business Financing Indicators report.’