Businesses Are Relying On Credit Cards at ‘Alarming’ Rates
HALIFAX– In most households, alarm bells should sound if you start relying on the Visa or Mastercard to keep the lights on and have the bill collectors at bay. The same goes for businesses.
That’s why Equifax Canada is calling the numbers found in its latest survey “alarming.” As interest rates rise, and inflation continues to be a problem, businesses across the country are relying more and more on credit.
According to Equifax, the first quarter of 2023 saw a 15 per cent increase in business credit card balances compared to the previous year. Other lines of credit increased by 11 per cent.
Equifax Canada’s Jeff Brown says the increase in credit card usage by small businesses can be attributed to rising interest rates; getting a small business loan is more expensive now than it has been in many years.
“There are a lot of headwinds in the economy right now,” said Brown. “A big part of this is the growth in interest rates. It’s more expensive for the cost of capital. Trying to get a small business loan today to finance a major appliance or a piece of equipment, you’re looking at around $40,000 to $50,000 for the average ticket size for a small business loan.”
“What’s really interesting is, when the CEBA loans started [during the pandemic], all those interest-free, government-backed loans were used to pay down credit cards. And really what we’re seeing now is those credit cards are also being used to keep the business moving.”
Just like with a personal credit card, over usage is cause for alarm. Brown notes that credit card balances should be paid off immediately, rather than allow a balance to grow and collect interest.
“With these numbers growing, it’s important that as small businesses are using them they use them at a transaction basis. At Equifax, we call them a transactor. You’re using it, and then you’re paying it off.”
“But if you become a revolver, using that frequently, not paying off the full balance, you get yourself into a difficult situation.”
The numbers make it clear that small businesses are wary of taking out business loans right now. Despite the huge increase in cred card balances and other lines of credit, there has been a reduction in the balance of installment-based loans. Those business loans stand at $12.9 billion- a big number. Yet, it is 2.4 per cent less than in 2022.
“Again, the cost of capital is getting more expensive,” says Brown. “Typically, we look at installment loans as a health indicator for small businesses. You may have heard this adage from the past: you have to be spending money to be making money.”
“You want small businesses to take out loans because it’s the money they’re using to set up a new franchise location, or buy products that they can sell out to consumers.”
Hundreds of thousands of small businesses will soon be facing a higher debt load come 2024. Those previously mentioned CEBA loans are supposed to paid off this year, yet few businesses have yet done so. If they aren’t paid off in full soon, they will start collecting interest.
“There’s another thing in play with those pandemic loans,” states Brown. “The CEBA loans are due at the end of this year. 900,000 businesses took out these loans, and today, we’ve only seen about 13% of businesses pay them back in full. And at the end of this year, those loans… start accumulating five per cent interest per annum.”
But bad debt loads aren’t the only bad signs. Canada is also slumping when it comes to expected new businesses popping up.
“In the 2019 peak months, [May-July], we saw about 50,000 businesses start up. Over the past year, it’s been around 20,000 to 30,000. So, we’ve seen significant drops compared to the peaks of 2019. And we’ve seen drops as well, as we compare ourselves to last year. We’re not performing to that same level. We’re not expecting the kind of the watermarks we’re used to seeing over the last couple of years.”
The big question is whether these alarming numbers are a temporary part of a larger cycle, or if they are signs of a longer economic slump. Brown says a lot remains to be seen before any predictions can be made. A big factor will be what the Bank of Canada decides to do with interest rates.
“I’d like to paint a silver lining to it. But the numbers are going to tell us here in the next few months. If we see the numbers [for new businesses] climb back… during the summer, then there’s reasons to be positive about it. Everything’s going to be tailored around what we’re looking at with inflation interest rates.”
Derek Montague is a Huddle reporter in Halifax. Send him your feedback and story ideas: [email protected].
