Commercial Insights: A Shift In Business Credit Usage
As borrowing behaviours continue to evolve, financial institutions and lending organizations should consider adapting their offerings to meet the changing demands of consumers and businesses. Understanding current economic and industry trends can help lenders make informed credit decisions. Below are insights on the Canadian economic landscape, industries to watch for financial distress, and opportunities for lender growth from Equifax Canada’s Q1 2023 Market Pulse Quarterly Business Credit Trends Report.
The Current Economic Landscape for Businesses
New Equifax Canada data suggests a pattern of credit expansion and a significant shift in credit usage, indicating potential challenges for Canadian businesses. Credit card balances grew by 15 percent, while lines of credit showed an 11 percent increase compared to Q1 2022. “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,” stated Jeff Brown, Head of Commercial Solutions at Equifax Canada.
Despite the rising interest rates and concern about an economic downturn, the majority of Canadian businesses have a positive outlook. According to Statistics Canada, 73.5 percent of businesses surveyed are optimistic about the next 12 months.* Even with the optimism of businesses, lenders should continue to consider the potential risks and consequences of the current credit landscape.
Industries and Sectors to Watch For Financial Distress
Which industries saw changes in delinquencies in Q1? The construction industry is performing well with a decline in delinquency both on a quarter-over-quarter and year-over-year basis. The manufacturing and transportation industries reported a decrease in delinquencies this quarter, while the retail trade and services industries remained fairly flat. The finance/insurance/real estate segment, which includes property holding and property management companies, is experiencing increases in delinquencies both on a quarter-over-quarter and year-over-year basis.
"The persistent rise in early delinquency rates in these trades suggests that businesses are struggling to meet their financial obligations," Brown explained about the impact of early delinquencies on financial and industrial trades. "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."
Business Lending and Growth Insights
Among reported businesses, credit activity levels are stabilizing to pre-pandemic levels after hitting a peak in Q2 2021. There has been a shift in credit usage from loans to lines of credit and cards as the cost of borrowing has increased. The interest rate hikes are likely contributing to the slump in new business starts. In Q1, there was a slowdown in new business openings, which is a deviation from the previous growth trajectory. As of the end of February, new business starts are down year-over-year by 16.5 percent in Ontario, 14.2 percent in B.C., 11.4 percent in Alberta, and 7.5 percent in Quebec.
With the slump in business openings and concern over signs of financial stress, lenders can benefit from reliable market insights. These economic trends can be used to assess lender’s risk exposure across multiple commercial sectors and allow them to make more informed credit decisions with speed and consistency.
To learn more about understanding business trends and credit insights, please contact your Equifax Account Representative. You can also reach us directly at 1-855-233-9226 and follow us on Twitter and LinkedIn.
*Source: Statistics Canada. The Daily - Canadian Survey on Business Conditions, second quarter 2023.
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