BDC Study: Small Businesses Vulnerable to High Interest Rates

The Business Development Bank of Canada (BDC) released a study on December 5, 2023, highlighting the vulnerability of small and medium-sized enterprises (SMEs) to high interest rates. While many economists anticipate the Bank of Canada will maintain its key interest rate, the study reveals the challenges SMEs face in the current financial environment, including difficulties in servicing their debts.

The research found a significant difference of 6.2 percentage points in interest rates paid by large corporations compared to SMEs. This gap is partly attributed to the types of rates companies secure, with 39% of smaller SMEs having variable rates on commercial loans (excluding mortgages), versus only 13% of larger SMEs.

The impact of the economic climate also varies by company size. Nearly half of smaller SMEs (under $3 million in sales) find debt repayment more difficult than 12 months ago, compared to just one-third (32%) of larger SMEs (over $10 million in sales).

Half of all SMEs have seen their debt levels increase over the past year due to reduced economic activity and rising rates. Consequently, half have experienced profit declines, and a third have had to dip into personal savings. Furthermore, over a quarter of SMEs report cancelling or postponing investment projects, potentially hindering Canada's productivity growth.

BDC's survey included 1,505 business owners and was conducted between September 7 and 18, 2023.