The increasing business insolvency filings in Canada have been making headlines, leaving many wondering what factors have led to headwinds hitting businesses at such an alarming rate. In Q4 of 2022, there was a 58.3% year-over-year increase in Canadian business insolvency filings, according to data from the Office of the Superintendent of Bankruptcy Canada. What is causing this increase in insolvency filings?
For starters, many Canadian companies are declaring insolvency and filing for bankruptcy due to unprecedented financial pressures. To understand what’s behind the uptick in insolvency cases, let’s take a closer look at the hard economic realities that Canadian businesses have found themselves in.
1. Economic Uncertainty
The economic uncertainty and disruptions from the recent pandemic have stoked fears of a recession and further decreased consumer confidence in the economy. As the global economy continues to struggle, many countries, including Canada, have seen a rise in unemployment, decreased demand for goods and services, and even greater financial pressure for businesses.
Additionally, uncertainty in the global economy means organizations have difficulty accurately predicting the future and adjusting their spending accordingly. This has resulted in many businesses overspending, particularly on technology investments. According to Gartner, 51% of enterprise technology spending in key IT categories is anticipated to move to the cloud by 2025.
This shift to the cloud has only accelerated over the past few years due to the pandemic as businesses had to react to changing social and business dynamics. In the coming year, it is projected that companies will end up overpaying for 75% of their IT purchases, affecting the bottom line.
Other businesses have been hit hard by the sudden drop in demand for services, such as limousine drivers who, on average, would have made about 105 trips each week before the pandemic. These conditions further add to the strain on resources. They have made it difficult for businesses to remain profitable and secure the financing they need to sustain themselves, leading to a significant increase in insolvency filings.
While the pandemic and the ensuing economic hardships can be seen as a major contributing factor to the increasing number of insolvency filings in Canada, other factors also need to be considered. Rising interest rates, high inflation, and the end of government support, such as the Canadian Emergency Response Benefit (CERB), have all added to the financial pressures experienced by Canadian businesses.
Rising Interest Rates
Increasing interest rates have exacerbated the dire situation of the business environment. Businesses often borrow money to finance assets, investments, and operations, as well as for cash flow purposes.
As the Bank of Canada’s key interest rate increases, which is currently at 4.25%, lenders charge higher rates on loans, squeezing Canadian businesses even more and making it harder for them to repay their debts. This ultimately leads to insolvency if the burden becomes too great.
High Inflation
High inflation is one of the main contributors to the skyrocketing insolvency filings in Canada. As the economy recovers from the pandemic, prices have increased across various sectors, resulting in decreased purchasing power. This has caused an immense strain on businesses and their ability to stay financially afloat.
According to data released by Statistics Canada, the overall inflation rate rose 6.8% year over year in November 2022. Business owners have to take costly loans to cover expenses. ultimately they experience challenges paying back, leaving them with no choice but to file for insolvency.
Final Word
Corporations facing financial difficulty have various options to help them navigate their current troubles, including the Bankruptcy and Insolvency Act (BIA) or the Companies Creditors Arrangement Act (CCAA). However, even with the immense difficulties facing many businesses, there is still time to take proactive steps to prevent becoming insolvent. For instance, business owners should review their financial situation, explore all available funding sources, and make sound decisions considering the current economic climate. With the right strategies, businesses can survive and thrive despite uncertain times.