Small business default rates doubled during COVID pandemic: report

Small business loan defaults skyrocketed despite federal COVID relief programs, exacerbated by recurring lockdown mandates and crippling economic sanctions imposed by the government.

In 2020, the feds created the Canada Emergency Business Account (CEBA) to keep businesses afloat during the COVID pandemic. Between April 2020 and June 2021, 898,271 businesses received $49.2 billion in taxpayer assistance.

The $60,000 loans covered expenses, including patio expansions, personal protective equipment and other pandemic-related needs under the issuance of public health decrees. It also topped off the wage and rent subsidy programs offered to businesses.

However, small businesses have yet to recover from the devastation wrought by the government's pandemic response, citing inflationary pressures as well as supply chain and hiring woes that left many in a ruinous state. 

“The Covid-19 pandemic and subsequent economic recovery exerted a significant effect on the market dynamics within which program borrowers operated,” said a Department of Industry report Canada Small Business Financing Program: Cost-Benefit Analysis. 

With an additional $1.2 billion in loans approved under the Canada Small Business Financing Act, known defaults totalled $87 million in 2021 — nearly double the $44.2 million in 2019, reported Blacklock’s Reporter.

While loan defaults from 2020 through 2022 totalled $220.9 million, those after the 2008 financial panic cost taxpayers $176.4 million. It is not yet known the total value of CEBA loan defaults.

“With the onset of the pandemic there was a substantial increase in the claims processed, reaching approximately 900 in 2021,” said Cost-Benefit. Loans guaranteed under the program averaged $247,000.

It guaranteed loans up to 85% to a maximum of $1.15 million with an additional $150,000 lines of credit. Loans are charged at prime plus three percent.

According to a Federation report published in June, "54% of businesses reported below-normal revenues, and 62% still carried unpaid debt taken on during the pandemic." 

As of January 26, 2022, the federal government gave $49.2 billion in Canada Emergency Business Account (CEBA) loans to 898,271 businesses.

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Despite receiving two extensions to pay their CEBA loan balance without interest, an estimated 69% of members who applied for loans could not repay what they borrowed, reported Blacklock's Reporter. The latest available data estimated the average loan carrier is $158,000 in debt.

As of May 31, a mere 21% of small businesses have fully repaid the loan.  

Only 18% of those who borrowed have repaid the loan as of September. 

Another 18% of applicants surveyed had to borrow on lines of credit, take out second mortgages and run up credit card balances to stay afloat, with some taking high-interest loans to avoid late penalties.

Federal auditors have their work cut out for them following another investigation involving millions in payments to a federal contractor.

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When comparing the default rates of different industries, hotelkeepers and restaurateurs experience the highest rate, according to the industry department. The tourism collapse during the pandemic led to industry revenues falling 69% with 440,000 layoffs, said the Canadian Tourism Commission.

A survey published last year found that nearly half of the licensed restaurateurs who accessed the loan operated at or below profitability levels, costing the food-service industry about $750 million annually. 

Restaurants Canada at the height of the pandemic estimated 10% of members closed permanently with 800,000 total layoffs. 

According to the Department of Industry, 120,344 businesses “disappeared” after the pandemic, said a department report Key Small Business Statistics. It counted 1,216,550 operations nationwide last year compared to 1,226,454 in 2020, reported Blacklock’s Reporter.

Despite new start-ups offsetting some closures, Canada had a net loss of 2,700 restaurateurs and hotelkeepers between 2020 and 2023. 

“The impact on global tourism has been immediate, widespread and deep,” the Commission wrote in a 2021 Corporate Plan Summary. It claimed the economic repercussions of lockdowns and travel bans exceeded that of 9/11 or the 2008 financial recession.