Understanding the Impact of Interest Rates on Small Businesses

MONTREAL – BUSINESS – As the Bank of Canada gears up for its next key interest rate announcement, a new study from BDC sheds light on the ongoing struggles of small and medium-sized enterprises (SMEs) in Canada. The study, conducted by BDC, Canada’s bank dedicated to entrepreneurs, emphasizes the fragility of SMEs in the face of high interest rates, even as economists predict the current rate will remain unchanged.

The Interest Rate Gap: A Challenge for Smaller SMEs

A striking finding of the BDC study is the substantial 6.2 percentage point difference in interest rates between large corporations and SMEs. This gap partly stems from the types of rates chosen by these businesses: 39% of small SMEs have variable rate loans, in contrast to only 13% of larger corporations.

How Interest Rate Hikes Affect Different Businesses

The impact of economic conditions and interest rate increases is uneven across the board. The study shows that smaller companies, those earning less than $3 million in sales, face greater difficulties in debt repayment than their larger counterparts, with over $10 million in sales.

The Real Cost of High Interest Rates on SMEs

Pierre Cléroux, Vice President, Research, and Chief Economist at BDC, notes that “the economic slowdown and rising interest rates are impacting businesses differently, just like households.” He explains that many SMEs are paying rates higher than initially expected, especially smaller businesses, making them more vulnerable.

Investment Plans Suffer Amid Economic Pressures

With declining economic activity and rising interest rates, SMEs are seeing an increase in debt levels. This has led to decreased profits and, in some cases, the use of personal savings. The study reveals that over a quarter of SMEs have either canceled or suspended investment projects, a concerning trend given the need for technological investment to counter labor shortages.

The Long-Term Implications for Canadian Productivity

Cléroux warns that persistent high interest rates are influencing business owners to delay or cancel investments. This could have long-term repercussions for Canada’s productivity, which already lags behind other countries. The deferral of investments by SMEs contributes further to this widening gap.

For more information, please read the full study report here.