(Toronto) Businesses shifted their use of credit significantly in the first quarter of 2023, new data released Tuesday by Equifax Canada reveals.

According to the credit rating agency, the latest figures highlight growing financial stress in the financial and non-financial trading sectors, and cast doubt on the stability of the Canadian economy.

The total business outstanding balance on installment loans issued by banks was down 2.4% from the first quarter of last year, to $12.9 billion, Equifax said.

However, credit card balances increased by 15% and lines of credit increased by 11%.

Jeff Brown, head of business solutions at Equifax Canada, said the change in businesses’ use of credit is alarming.

The head of business solutions at Equifax Canada, Jeff Brown, said the shift in businesses’ use of credit was alarming.

“It’s not something we’ve seen in recent years,” he said. It’s kind of like an early warning indicator. »

Installment loans are typically used for growth and expansion, Brown explained.

“You have to spend money to make money when you’re a small business,” he said. When you see a hole in this process, you see growth in credit card spending, and that’s usually a sign of financial instability. »

Equifax said the Bank of Canada’s rate hikes may have contributed to this trend, convincing businesses to shift to credit products that don’t lock homeowners into fixed repayment periods and offer greater interest rate flexibility.

While many businesses have already incurred additional debt during the pandemic, including through resorting to government loan programs, the accumulation of credit card debt could put businesses in a hole that will be difficult to climb out of. themselves, Mr. Brown said.

General business conditions are getting tougher, said Conference Board of Canada chief economist Pedro Antunes.

Companies that rely on short-term credit products are “not a good sign”, he warned.

Bankruptcy levels are not a disaster at this point and are now back to pre-pandemic levels, but the upward trend nonetheless gives some idea of ​​the challenges businesses are facing with the economic downturn, Antunes said.

The decline in installment loans and the shift to using credit cards could hamper the growth potential of businesses and their ability to make larger investments, Equifax argued.

This is the first quarter we’re seeing this change, Brown pointed out, noting that companies may just be experimenting and hoping interest rates normalize. Banks are probably a little tougher on lending since the US banking crisis, he noted.

But over time, using credit cards could become a dangerous habit, and a drop in small business spending could have fallout, he warned.

“All of these debts are starting to pile up, so we’ve seen delinquencies go back up to near pre-pandemic levels,” Brown noted. We just don’t want to see this trend continue. »

The consumer has shown resilience as households spent savings they had accumulated during the pandemic, but Antunes expects spending to slow going forward, which will weigh on businesses.

“A lot of these surpluses that households hold are, I believe, reduced by inflation and by interest rates,” he said.

The Conference Board’s Confidence Index shows that businesses aren’t feeling optimistic, Antunes continued, and are likely to hold back on spending or investing.

Equifax said the industrial and financial sectors in particular were showing signs of financial stress, which could have ripple effects on the overall economy.

The first quarter also saw a slowdown in new business openings, a trend Equifax calls concerning. January, February and March showed a steady increase, on a month-to-month basis, in new businesses opening for the past two years, the agency said, but a noticeable drop occurred in 2023.

By the end of February, new business starts had declined year over year by 16.5% in Ontario, 14.2% in British Columbia, 11.4% in Alberta and 7.5% % in Quebec.

Brown said this trend is expected to continue through the summer as economic conditions weaken amid higher interest rates.

“There could be a whole backlog of aspiring entrepreneurs who want to start their business, but know that now is just not the right time,” he said. The cost of borrowing money is too expensive. »