According to the Equifax Canada Market Pulse Business Credit Trends Report for Q1/23, new data suggests a pattern of credit expansion and a significant shift in credit usage, indicating potential challenges for businesses. Additionally, the report highlights growing financial stress in the industrial and financial trades.
The total outstanding balance on bank-issued installment loans in Canada currently stands at $12.9 billion, which has experienced a year-over-year decline of 2.4% , a first since 2019 when Equifax began monitoring this data. By contrast, during the same period, credit card balances grew by 15% , while lines of credit experienced 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,” Jeff Brown, head of commercial solutions at Equifax Canada, said.
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 toward 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.
Slump In New Business Starts
In the first quarter, there was a slowdown in new business openings, 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 COVID-19 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.
Industrial and Financial Trades Show Signs of Stress
The industrial and financial trades are also showing signs of financial stress.
“Delinquencies in industrial trades are nearing pre-pandemic levels, with late delinquencies rising by 9% within a 60-day window annually,” Brown said. “We’re seeing this primarily in trades located in British Columbia and Alberta, suggesting that businesses operating in these regions are facing a particularly challenging economic environment.
“The persistent rise in early delinquency rates in these trades suggests that businesses are struggling to meet their financial obligations. Typically, businesses prioritize paying their suppliers to maintain operations, but it is disturbing to see consecutive quarterly increases in delinquencies on the supplier side as well.”
Majority of Canadian Businesses Have a Positive Outlook
Despite the challenges posed by rising interest rates and high inflation, Statistics Canada data shows that 73.5% of businesses surveyed are optimistic about their future over the next 12 months.
“Equifax data also suggests some regional gains in the demand for commercial credit, which is a positive sign and speaks to the resilience and optimism of Canadian businesses,” Brown said. “However, it is essential to consider the potential consequences of the current credit landscape. Equifax Canada continues to monitor the situation closely and provides crucial data to support businesses and lenders so they can make informed credit decisions during these uncertain times.”
According to Equifax, as borrowing behaviors continue to evolve, financial institutions and lending organizations should consider adapting their offerings to meet the changing demands of consumers and businesses. Understanding these trends can help individuals and organizations make informed decisions regarding their credit choices.
