Canadian Businesses Are Going Broke At An Unusually Fast Rate Due To Inflation

Canadian Businesses Are Going Broke At An Unusually Fast Rate Due To Inflation

Canadian business insolvencies are back after being quiet over the past few years. Data from the Office of the Superintendent of Bankruptcy Canada (OSB) shows business insolvencies jumped in Q1 2022. High inflation and withdrawal of support drove filings back to early 2020 levels. Experts see this as the beginning of a bigger trend, with higher rates expected to add more pressure.

Canadian Business Insolvencies Are Up 33.8% From Record Lows

Canadian business insolvencies are approaching early 2020-levels after a surge last quarter. The OSB reported 807 insolvency filings in Q1 2022, up 10.1% from the previous quarter and 33.8% higher than last year. There is a base effect making the annual growth sound a lot worse than it is. However, this is still very rapid growth which can be worse than just normalization.

Canadian Business Insolvencies

The number of insolvency filings made by businesses across Canada.

Source: CREA; Better Dwelling.

Eliminating any sort of seasonal change, the rolling sum over the past 12-months is rising too. Businesses filed 2,648 insolvencies in the 12-months ending March 2022. This was an increase of 7.1% when compared to the same period last year. It’s not just a seasonal skew.

Canadian Businesses Hit By Inflation, Withdrawal of Gov Support

The first thing that probably comes to mind is, “those darn rate hikes!” March is the last month in the first quarter, so businesses had only faced a minor rate hike at that time. Insolvency experts attribute the issue to high inflation and withdrawal of government support. High inflation is even crushing the bottom line at big companies. As for government support, Q1 2022 is the first quarter many businesses had the training wheels taken off. It appears it’s not going well for some.

Business insolvencies are approaching typical levels, but they’re expected to rise further. “The number of businesses becoming bankrupt or filing proposals is growing and likely to worsen under the stress of inflation and as the cracks begin to show following the withdrawal of pandemic-related government support,” says Jean-Daniel Breton, Chair of CAIRP, an organization representing insolvency professionals.

Businesses haven’t escaped higher interest rates either. That problem just hasn’t materialized yet. “With inflation now at a 30-year high and the Bank of Canada looking to correct with several interest rate increases this year, it stands to reason that we could see even further surges in the rate of business insolvencies,” says Breton. 

Segments like real estate are showing stress at almost half the pre-2020 interest rate. The environment isn’t exactly punitive, but highly indebted consumers don’t have much cash.

Insolvencies Only Capture A Small Share of Struggling Businesses

Insolvencies tend to paint a better picture than reality for Canadian businesses. We only have January 2022 business closure data, but 34,574 businesses closed that month. That’s significantly higher than the number of insolvencies.

Not every business that closes results in an insolvency filing. Some businesses wind down in a more orderly fashion, but many shift the shuttered business debt into a personal liability. Those liabilities can add up to a completely different problem later.

“Small business owners often overlook formal steps that can be taken to wind down the business. Simply walking away from the business instead of seeking counsel from a Licensed Insolvency Trustee eliminates any opportunity to restructure the business into a growing concern or if that cannot be achieved, to optimize the recovery for creditors and employees,” he explained. 

Canadian businesses are getting hit from all sides — inflation, real estate, and rising rates. The recent surge can just be a normalization of filings, but the growth is substantial and sudden. Filings are just approaching historic levels, but doing so at a rate that may blow past those numbers. It’s worth keeping an eye on this to see if it’s normalization or something worse.