Small businesses are increasingly turning to high-interest debt such as credit cards to keep the lights on, according to a new survey from Equifax Canada.
“I think what we’re really starting to see now in the economy is the fallout of the pandemic. A lot of small businesses have had a lot of debt accumulated from a pandemic,” Jeff Brown, head of commercial solutions at Equifax Canada, said in a phone interview.
“We’re seeing this in terms of the usage of their financial products. They’re using a credit card to grow, or at least as a way to keep the lights on.”
Business credit card balances ballooned 15 per cent and lines of credit rose 11 per cent in the first quarter year-over-year, the survey released on Tuesday found. Meanwhile, small businesses owed a collective $12.9 billion in bank-issued installment loans, a small 2.4 per cent decline compared to last year.
Equifax suggests companies may be shifting credit products to avoid having a fixed payment schedule, a move that could hinder their ability to grow and make larger investments in the long term.
Brown says it’s okay if business owners are paying their credit card bills off in full every month, but that’s not the case for many.
“If you’re a revolver and you’re accumulating debt, it’s a slippery slope. So the more credit card usage there is, the more likelihood that there will be more revolvers hitting the market,” he said.
He adds it’s a “sign of struggle to come” if small businesses aren’t paying down their debt burdens while the economy shows signs of stabilization and consumer spending is robust.
The average bank loan size for a small business is typically between $40,000 and $50,000, Brown says.
Small businesses that also took advantage of the federal government’s pandemic-related Canada Emergency Business Account (CEBA) are about to see debt service costs go up.
CEBA loans will begin incurring five per cent annual interest starting in the new year. So far, the government has allowed businesses to carry those loans interest free.
“I think there’s maybe not enough attention being brought to these CEBA loans, the fact that there’s the $49 billion of debt that’s been issued out. I think there’s a lot of small businesses across Canada right now, just hoping that there’s gonna be some sort of forgiveness or bailout from the government,” Brown says.
“But we’re not hearing or seeing any signs of that. So I think small businesses kind of have hope as a strategy to a certain degree because we’re just not seeing the payback of those loans the way they should be.”
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.
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