It’s costing more to do business and that may be the end for some

Advisors with business clients may find multi-layer challenges are proving too hard to navigate

It’s costing more to do business and that may be the end for some
Steve Randall

Every industry and business is different but generally this decade has proven challenging for Canada’s small and medium enterprises (SMEs).

Leaping almost seamlessly from pandemic to inflation to higher rates, SMEs continue to deal with unprecedented struggles just to keep the business open, let alone trying to grow.

A new report from the Business Development Bank of Canada (BDC) highlights the financial issues that are keeping many Canadian business owners awake at night.

It shows that the cost of doing business grew 600% more between 2020 and 2021 than it did between 2013 and 2019 and this has hit businesses hard with 65% saying they have felt the negative impact of rising costs.

Cost of not doing business

Of course many Canadian SMEs mitigated the devastating effects of the pandemic on their business by accepting government support, most notably the Canada Emergency Business Account (CEBA) loan.

But thousands of small businesses will lose the forgivable portion of these loans at the end of 2023, which will add up to $20,000 more to their debt and cause them to face 5% interest on the full balance.

The Canadian Federation of Independent Business says 250,000 SMEs will be affected, that’s 19% of all small businesses in Canada, unless the government extends the deadline for repayment.

"The message from small businesses is loud and clear: they need more time to repay their CEBA loan. With only half of small businesses back to normal sales, most businesses — particularly in the arts, recreation, hospitality and the service sectors — will need extra runway," said Dan Kelly, CFIB president. "Financial institutions still have time to delay repayment processes if the government extends the CEBA deadline, but that window is closing. Ottawa needs to act now."

More pain ahead?

The Canadian economy has shown its resilience in recent months, surprising many and forcing the Bank of Canada to resume rate hikes to try to dampen inflation.

But there are headwinds including the delayed impact of rate rises on consumers, especially mortgage holders who may have been managing to keep a lid on their budget at first but are now at risk of being overwhelmed.

And the potential for a harder-than-expected landing for the economy cannot be ruled out.

RBC Economics said Thursday that “the only true ‘soft landing’ scenario is one where inflation pressures slow quickly back to target rates without a deterioration in the economy, and that still looks unlikely.”

The bank’s experts believe a bumpy landing is likely and points to warning signs such as weakening labour demand and tightening credit markets.

Being prepared

The BDC report says that upward pressure on certain costs will continue over the long term, driven by three major trends: an aging population, the green transition, and the effects of globalization on import-export.

It sees clear trends in how these factors are affecting small businesses:

  • Over a third of companies (36%) cite labour costs as the main negative impact of rising costs. In comparison with others, companies that have laid off staff were 11% more likely to be unprofitable over the past year.
  • The majority of SMEs (57%) expect climate change to increase their costs over the next three years. About 40% still believe their costs will not be affected. Businesses that have reduced their carbon footprint over the past three years are 7.7% more likely to have achieved strong growth over the past year than those that have not.
  • Among SMEs engaged in international trade, 68% have already implemented a sourcing strategy to improve their resilience, but 79% expect this to increase their costs.

With the road ahead looking potentially hazardous for SMEs, the BDC says businesses must focus on profitability.

It suggests three strategies that entrepreneurs use most often to boost profitability and the ones that work most successfully:

  1. Using technology to modernize processes (25%), which improves business efficiency and helps revenue growth outpace rising costs; 
  2. Reducing the carbon footprint (14%), which helps with cutting energy costs, improving efficiency and reaching a wider market; 
  3. Proactive cost management (12%), which enables regular monitoring of financial performance to optimize costs and revenues. 

 "We're not going backwards; the business environment is changing, and small businesses may be tempted to postpone their strategic thinking or certain investments to support their long-term survival," says Pierre Cléroux, Vice President, Research and Chief Economist at BDC. "Downsizing and the absence of a mitigation strategy can no longer ensure a company's survival".