Thousands of small businesses in Canada are teetering on the brink of bankruptcy after the government terminated pandemic-era support last month, coinciding with a slowdown in the economy and elevated interest rates.

The impact of this impending crisis is particularly significant as small firms employing fewer than 100 people contribute to almost two-thirds of the nation's 12 million private workers.

Surge in Canada's Business Insolvencies

The risk of bankruptcies in the country has intensified, with a notable 38% surge in business insolvencies during the first 11 months of 2023, according to a report by Reuters. This alarming trend has prompted warnings from lobby groups and economists about its adverse effects on economic growth.

Finance Minister Chrystia Freeland disclosed that approximately 900,000 small businesses faced a critical deadline last month to repay interest-free loans of $60,000 provided by the government during the pandemic.

However, a fifth of these businesses have yet to settle their loans, according to the minister. The Canadian Federation of Independent Businesses (CFIB) estimates that a quarter of businesses missed the repayment deadline, signaling a potential crisis in the small business sector.

The Office of the Superintendent of Bankruptcy reported a staggering 41% increase in business insolvencies in 2023, amplifying concerns about the challenging economic climate for businesses.

Pedro Antunes, Chief Economist at the Conference Board of Canada (CBC), expressed worries about plummeting profits, stresses related to loan repayments, and the possibility of further job losses.

"Profits have plummeted and we've seen the stresses of CEBA loan repayments due, and perhaps other stresses coming into play," Antunes said.

While Finance Minister Freeland reassures that the Department of Finance does not anticipate a negative impact on the economy due to loan repayments, Dan Kelly, President of CFIB, warns that numerous businesses, although viable, may struggle to outrun their debt.

The CFIB estimates that around 225,000 businesses resorted to borrowing from banks at a higher interest rate to repay their loans, given the current 22-year high in interest rates.

Stephen Tapp, Chief Economist at the Chamber of Commerce, foresees a rise in insolvencies over the next six months, echoing concerns expressed by the CBC.

"We do anticipate... a rise in insolvencies over the next six months or so," Tapp said.

The Canadian Association of Insolvency and Restructuring Professionals (CAIRP) reported the sharpest increase in business insolvencies in 36 years of records.

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Decline in Canada's Q1 Corporate Profits

Consumer spending in 2024 is anticipated to decline further, according to the CBC, as the aftermath of pandemic lows continues to impact businesses. With government support receding, small businesses are expected to face higher costs and reduced sales.

The insolvency numbers also shed light on personal bankruptcies, with a 23% rise in consumer insolvencies reported last year. Factors contributing to personal bankruptcy include the high cost of living, soaring credit card debts, and elevated interest rates.

The CBC predicts a nearly 50% decline in first-quarter corporate profits and a weaker overall performance throughout the year.

As the Canadian business landscape remains on the precipice, experts urge vigilance and proactive measures to mitigate the impending wave of bankruptcies that threatens to disrupt the nation's economic fabric.

The government faces mounting pressure to consider interventions, including potential interest rate adjustments, to alleviate the financial strain on businesses and avert a full-blown economic crisis.

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