BoC rate hold expected but will it make much difference to businesses?

BDC survey shows how many smaller Canadian businesses remain vulnerable

BoC rate hold expected but will it make much difference to businesses?
Steve Randall

The Bank of Canada is widely expected to keep interest rates at 5% when it announces its latest decision today (Dec. 6), but small and medium sized enterprises may be indifferent.

Smaller SMEs are already vulnerable due to high levels of debt at interest rates well above the BoC’s benchmark overnight rate, and well above the rates paid by larger peers according to a new report from the Business Development Bank of Canada.

The gap between rates paid by smaller SMEs (less than $3 million revenue) and those paid by larger businesses ($10 million or more) is as high as 6.2 percentage points with 39% of smaller businesses with commercial loans on variable rates compared to just 13% of large SMEs.

The smaller cohort is also more likely to say they cannot repay their debts (47%) compared to larger firms (32%).

"As with households, the economic slowdown and rising interest rates are not affecting all businesses in the same way," said Pierre Cléroux, VP of research and chief economist at BDC. "Even if the current rate is maintained, many SMEs will continue to pay a rate well above that which they had originally anticipated, particularly the smaller ones, making them particularly vulnerable."

Wider impact

While vulnerable SMEs could continue to struggle or even cease trading, there is a wider impact for SME owners and the Canadian economy.

Owners may see reduced profits – half of poll participants said this was the case over the last 12 months – and some owners may use their personal savings to support their business, as reported by one third of respondents.

And business investment is also being impacted with more than a quarter of SMEs report having cancelled or suspended investments in areas such as technology which is important to navigate the challenges of labour shortages.

"Continued high interest rates seem to have a real impact on business owners' decisions to cancel or postpone investments, even though these may benefit them in the long term," Cléroux points out. "Canada already lags behind in productivity, so any deferral of investment by SMEs contributes to widening that gap."