The rise of small business delinquencies: What you should know

Running a small business has always comes with its fair share of challenges, but today’s economic landscape is pushing many owners to their limits.

Inflation is driving up costs, the disposable income of consumers is diminishing, rents are rising, leaving many businesses scrambling to keep up. These pressures are leading to financial struggles that — if you turn a blind eye — can quickly lead to insolvency discussions.

Earlier this year, the Canadian Association of Insolvency and Restructuring Professionals (CAIRP) found that business insolvencies in Canada rose by 41.4 percent in 2023 compared to 2022 — the biggest jump in 36 years. To put a number to it, 4,810 Canadian businesses filed insolvencies in 2023.

So, what’s causing this surge in delinquencies, and what can a small business owner, like you, do to avoid it?

Economic pressures hit small businesses hard

Right now, small businesses, particularly those in hospitality and retail, are facing rising costs on all fronts. Already these businesses are feeling the ripple effects of inflation. Prices for products are going up, your staff want higher wages, and it’s becoming increasingly difficult to turn a profit. Add to this the rising rent and energy costs, and it’s easy to see why so many businesses are struggling.

At the same time, consumers have less disposable income. With interest rates and inflation cutting into spending power, people aren’t dining out or shopping as much as they used to. Even when they do, they’re likely spending less, which directly impacts the revenues of small businesses. Small and medium-sized businesses tend to be a bit more vulnerable to changes in consumer spending, so these organizations may feel the pinch of tighter budgets before a larger business.

It’s a perfect storm of higher costs and lower sales.

The debt trap

For many businesses, debt has been a way to manage their finances during hard times, but it’s becoming a heavy burden. Interest rates went up, and so did the payments on loans and credits. And with debt payments increasing, there’s even less money for businesses to cover the day-to-day operations.

Combine this with the double whammy of increased costs and decreased revenue, and you have immense pressure being put on cashflow. It’s a vicious cycle that’s becoming harder to escape.

Get real about your finances

One of the most important steps any small business owner can take is to sit down and have an honest conversation about their financial situation. Think about your debt load: Are you just getting by? Are your relying on credit? How much more debt can you carry?

This is a tough conversation to have. Remember to have compassion for yourself and not let pride get in the way of asking for help.

Many business owners hesitate to talk about debts — perhaps they feel like they’ve failed or should have all the answers. There’s no shame in admitting that your business is facing financial pressure. The key is to act before it’s too late.

By talking to an advisor or seeking professional guidance, you can gain a clearer understanding of your options and start taking steps to reduce the burden. And the sooner you address these issues, the better your chances of turning things around. Don’t wait until the eleventh hour, when you’re facing limited options and may need to file for Bankruptcy or a Consumer Proposal.

Recognize the warning signs and act before it's too late

No business owner wants to think about financial trouble, but recognizing the early warning signs can make all the difference. Some important red flags to look out for include:

• Struggling to make monthly payments
• Declining revenue or cashflow issues
• Growing reliance on credit to cover operating costs

If any of this sound familiar, it’s time to take action. Many business owners wait too long to seek help, thinking things will improve on their own. However, acting early can prevent long-term damage and help keep your business afloat.

Solutions for struggling businesses

If your small business is facing financial difficulties, don’t panic — there are options available to you. Working with financial advisors or insolvency professionals can provide you with solutions tailored to your unique situation. Restructuring debt, for instance, can help reduce your payments and ease the strain on your cashflow.

Please remember: this is a tough situation. But help is available — you don’t have to go through this alone.

You don’t have to be another insolvency statistic

While small business delinquencies are on the rise, they don’t have to be the end of the road for your business. Recognizing the economic pressures, having honest conversations about your debt, and seeking help early can make all the difference.

And don’t let pride get in the way — addressing financial issues head-on shows strength and can save your business in the long run.

If you’re a small business owner and you’re feeling the weight of rising costs, slow sales, and heavy debt, remember that solutions are available. Reach out to us today for a free, no-obligation consultation to discuss your debt management needs.