Small businesses are the engine of the Canadian economy. As a result, there’s a strong imperative to provide credit that will contribute to the growth of small businesses in Canada — which means lenders must understand their credit behaviour within the context of broader economic trends and regional influences. TransUnion Canada’s Fall 2019 Business Lending Barometer shows signs of healthy growth for the most part, as businesses take on credit to fund their cash flow and future development, and delinquencies remain relatively low.
Small businesses are taking on more credit
There’s been a healthy growth in business lending over the last year, as evidenced by an increase in the number of businesses that have been extended credit. The number of open credit lines is up, too: 5.4% year-on-year as of September 2019 — a sign of confidence on the part of lenders.
An environment of slow-but-steady economic growth and low-interest rates makes business credit more attractive — and certain types of credit, in particular. Demand loans can be repaid at any time, without penalty, while lines of credit tend to be the most cost-effective way to access funds for cash flow.
The average balance per business borrower has grown over prior years across almost all of the main lending product types except credit cards (-0.66%) and demand loans (-0.39%). Business mortgage balances showed the highest growth (7.80%) followed by lines of credit (4.76%) and instalment loans (4.49%). Some regions bucked this trend, though, recording a drop in average credit balances: Quebec (-8.70%), Manitoba (-5.70%), Saskatchewan (-4.80%) and New Brunswick (-1.70%).
Many small businesses are seizing the opportunity to take on a mix of credit products that will enable them to invest in future growth. Average business credit balances were up by 6.1% over the same period, which indicates businesses may also be taking an optimistic view — for now. Lenders that understand the needs and profiles of their small business clients will be well-positioned to offer suitable credit solutions should economic conditions become less favourable.
Borrowers are managing repayments and keeping delinquencies down
The good news, for now, is that small-business delinquency rates (90 days or more past due) are down across all credit types. For demand loans, delinquency rates were down by 196 basis points year-on-year; for lines of credit, delinquency dropped by 107 basis points over the same period.
The average delinquency rate in September 2019 was 2.02%, while the consumer delinquency rate for Q3 2019 was 5.54%. There are regional variations in this trend, too. In New Brunswick and Prince Edward Island, delinquency rates were up by 19 and 45 basis points respectively, while Manitoba and Saskatchewan outperformed other provinces significantly, with delinquency rates down 325 and 309 basis points respectively.
To give some more context to these figures, a TransUnion study conducted earlier this year found that business owners generally use a mix of business and personal credit to fund their enterprise — and, when under financial pressure, are three times as likely to pay their business accounts first.
Mortgage loan balances up
The mortgage qualifying rules implemented last year have affected the residential market, with average balances down year-on-year. Those same rules do not apply to the commercial market, though. The average business mortgage balance in September 2019 was $1,532,174, up 7.8% year-on-year — the biggest increase among all credit lines. This is partly driven by a tight real estate supply and a historically low unemployment rate.
Taking an informed view
In an environment of slower growth with potential economic headwinds ahead, lenders need an informed view of the credit risk of their small business customers. Regional variations must be considered alongside the credit performance of the business and its owners. Understanding this relationship between business and personal credit will help lenders extend credit where it’s needed without incurring additional risk.