The number of bankruptcies filed by Canadian businesses is on the rise. According to the Canadian Association of Insolvency and Restructuring Professionals (CAIRP), there have been 807 business bankruptcies and proposals filed in the first quarter of 2022. This compares to 603 bankruptcies filed in the same period last year.
Representing a 34% year-over-year increase, this is the largest increase in more than 30 years. Dan Kelly is President of the Canadian Federation of Independent Business (CFIB), the country’s largest not-for-profit organization working to support small businesses. He says the sharp rise could point to a growing wave of defaults among businesses in Canada in the months and years to come.
“Only about a third of business losses during the pandemic were covered by government subsidies [and] the average small business takes on $160,000 in debt,” Kelly told CTV’s Your Morning on Wednesday. “So even though their sales had returned to normal, they now have to make payments at higher interest rates on the debt they incurred during the pandemic and for many this is the straw that overflows the vase.”
The number of business bankruptcies filed during the pandemic has remained below normal levels due to government grants and loans. However, with those supports no longer in place, Kelly said this has led to increased numbers. The sectors that have seen the largest annual increase in bankruptcy filings are construction, transportation and warehousing.
“Now that most of the pandemic restrictions like lockdowns and capacity restrictions are behind…these companies are looking at their books and saying, ‘Damn, I’ve got a ton of debt. “”
As a result of the COVID-19 pandemic, Kelly said it’s possible as many as one in six small businesses, or 180,000 businesses, will permanently close in Canada, unable to repay their debt.
“If that were to happen, think of the jobs it would take out of the system and the impact it would have on the whole food chain as companies go bankrupt and don’t pay their suppliers and don’t even pay the banks for any debt incurred,” Kelly said. “There are huge economic effects.”
Additionally, interest rate hikes by the Bank of Canada, along with rising levels of inflation, could drive business insolvencies at an even faster rate, CAIRP said.
To help slow the rate of bankruptcies filed by Canadian businesses, Kelly said part of the solution may lie in more debt forgiveness. Nearly 900,000 businesses have been approved for Canada Emergency Business Account (CEBA) loans, with up to 33% loan forgiveness. Raising the forgiveness rate would provide businesses with the help they need to stay afloat, Kelly said.
“If that were to increase…for some of the hardest hit businesses, we think more small businesses will cross the COVID finish line, and that’s really what the economy needs,” he said.
Watch the full video with CTV’s Your Morning at the top of this article to learn more about what’s driving some Canadian companies to file for bankruptcy.