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Business Insolvencies Surge Amid Rising Inflation and Interest Rates

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The number of Canadian business that filed for insolvency increased by 33.8% year over year in the first quarter — a direct consequence of the pandemic and marking a 31-year high, the Canadian Association of Insolvency and Restructuring Professionals (CAIRP) reported.

That figure could increase, CAIRP further warned, because of rising inflation and interest rates, the latter making debt more expensive and conceivably pushing more businesses to the precipice.

“The number of businesses becoming bankrupt or filing proposals is growing, and likely to worsen under the stress of inflation and as the cracks begin to show following the withdrawal of pandemic-related government support,” CAIRP’s Chair Jean-Daniel Breton said.

“The support measures, together with a heightened level of creditor patience, prevented an initial spike in business insolvencies. However, the reversal in the recent trend of decreasing insolvency filings, seen over the last two years, puts in evidence the economic damage caused by the pandemic.”

The 807 Canada-wide businesses that filed for insolvency represented 10.1% growth over the fourth quarter of last year, which CAIRP noted is approaching levels not seen since the beginning of the COVID-19 crisis. In the year ending March 31, 2022, business insolvencies rose by 7.1% compared to the previous 12-month period.

Making matters worse for businesses, the overwhelming majority of which are still recovering from pandemic-induced lockdowns and capacity restrictions, are supply chain bottlenecks wreaking havoc on virtually every industry, as well as rising petrol and raw material costs.

The net effect of this perfect storm is uncertainty among businesses for which fixed operational costs like rent and interest payments are imperative, putting downward pressure on cash flow in the process.

There were 23,153 insolvency proceedings filed in Q1-2022, a 4% quarter-over-quarter increase and a 2.8% decline from the prior-year period. New consumer insolvency filings substantially declined by 30.3% from a year earlier, and by 28.2% from Q1-2019.

Although consumer insolvencies are lower than they were before the pandemic, Canada was in low inflationary and interest rate environments back then. However, the rising cost of living could spur yet more business insolvencies as, from February to March, there was a 24.4% upsurge — the largest monthly increase in 13 years, CAIRP noted, further indicating that it could be a budding sign that consumers are buckling.

“Anyone with a variable rate loan will see carrying costs move higher. For households already struggling, even a 1% increase in interest rates can put them in a position where they are unable to service their debt,” CAIRP’s Vice Chair and and Licensed Insolvency Trustee André Bolduc said. “Anyone experiencing debt-related financial challenges should seek professional guidance as soon as possible.”

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