Interest rates, inflation stack odds against entrepreneurs, BDC says

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By Audrey Pridham

Higher input costs and inflation are putting a strain on entrepreneurs, with nearly 75 per cent indicating that rising costs are affecting their business, according to a recent Business Development Bank of Canada (BDC) study.

The study said these high costs are due to a 35 per cent increase in the industrial produce price index (IPPI) that occurred between spring 2020 and 2022.

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Arnaud Franco, BDC’s director of economic research, said geopolitical tensions have also had an effect, noting that energy costs remain high compared to pre-pandemic levels due to European countries building up their own capacity for natural gas reliquefaction.

Smaller businesses are struggling to absorb higher energy costs, which affect various inputs such as electricity and raw materials, Franco said. The compounding effect of rising energy costs has significantly impacted small business margins and revenues, as has increased labour costs. This has led businesses to resort to short-term loans, but they have also suffered increased default rates since mid-to-late 2023, he said.

“Bigger corporations pay less interest on their loans in general, and it just puts them in an easier navigation,” Franco said. “They can absorb these hits, whereas small businesses generally need to turn to emergency credit in order to cover some of those in the short term.”

Simon Gaudreault, chief economist and vice-president of research at the Canadian Federation of Independent Business (CFIB), said its own survey of conditions shows similar trends. Higher insurance, tax and regulatory, occupancy and borrowing costs have also been challenges, he said.

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“Although inflation seems to be a bit more under control, it only means it has stopped accelerating at a great pace,” he said. “But the level of prices has remained elevated, and for small businesses, that means that different types of input costs have increased.”

Gaudreault said rising carbon taxes and Canada Pension Plan (CPP) contributions also make it challenging for businesses to get ahead. He said there was a 48 per cent increase in the maximum CPP contribution payable by employers and employees between 2019 and 2024, and a 300 per cent increase in the carbon tax.

But he said the government’s recent announcement about carbon tax rebates for small businesses could provide significant financial relief.

“We’re talking about hundreds, if not thousands, of dollars that business owners can access in jurisdictions subject to the federal carbon tax,” he said.

Franco said rising inflation has made it difficult for smaller businesses to pass on price increases to their consumers, though this is not a good solution in any case. A better strategy, he said, is to pay attention to BDC’s finding that generation Z consumers prefer to shop for locally produced or environmentally friendly items.

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“By 2030, (gen Z) will represent a significant amount of the Canadian consumption basket,” he said. “Offering differentiated products to these sort of generations offers a really interesting opportunity for those businesses looking to differentiate themselves.”

Wage inflation is another issue, though it is at the Bank of Canada’s desired level, Franco said. But the slowing number of job vacancies and rising unemployment should help ease wage growth and benefit entrepreneurs struggling to find staff.

BDC presented a potential solution to mitigate these problems, which includes optimizing energy consumption and adopting cost-saving technologies, such as artificial intelligence programs. Franco said these programs can help free up staff for more value-added tasks and increase productivity.

“It’s necessary,” he said. “You need to stay ahead of the curve in order to continue innovating so that you can face these problems.”

Gaudreault agreed, but said small businesses aren’t always able to afford new technologies, and the current demand is below average due to the Bank of Canada being restrictive with its monetary policy and high interest rates.

“If it doesn’t improve on either side or, ideally, both sides, businesses won’t be able to save their money so they can invest in those technologies,” he said.

Gaudreault said business owners should re-evaluate their costs and shop around for the best deals on insurance and banking services to ensure that they are “tightly negotiated and reviewed.”

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