A summer of reckoning
Saddled with pandemic debt, one in six small businesses are considering closing, study finds
When Toby Sue Carrel opened her art studio in June 2021, she thought the worst of the pandemic was over. For the first few months, that certainly seemed to be the case.
The Riverdale Hive was buzzing with activity last fall. The pottery school, tucked among a row of shophouses along Broadview Avenue, could host up to 10 students per class with physical distancing in place. For much of the fall season, she had at least nine students in each of her classes.
“People were a lot more relaxed before Christmas,” said Carrel. “We all thought that we were at the tail end of the pandemic.”
But then came the Omicron variant. In 2022, revenue has dropped by 50 per cent from the previous year, with Carrel’s classes averaging about four students each. As inflation continues to climb, impacting the cost of living and general studio supplies, it’s been a stressful challenge to keep the doors open, she says
Though pandemic restrictions were lifted in most jurisdictions nearly half a year ago, many small businesses across the country are still struggling to recover. More than half of Canadian small businesses are reporting below-normal revenues compared to before the pandemic, according to a new report released Thursday by the Canadian Federation of Independent Business (CFIB). Meanwhile, more than six in 10 businesses are still saddled with unpaid debt accrued during the pandemic — $158,000 on average — according to the analysis.
“It’s increasingly difficult to run profitable operations right now,
and a lot of that is due to the ripple effects of the pandemic,” said Simon Gaudreault, chief economist and vice-president of research at CFIB.
For many owners, this is a summer of reckoning, with more than one in six small businesses across the country considering bankruptcy or permanent closure if revenue does not pick up.
“A lot of those intentions could materialize into actual business closures over the next several months, as businesses assess the situation and decide that revenues are not back to normal soon enough and that it’s not sustainable for them,” said Gaudreault.
Like many small business owners, Carrel took on debt to open the studio. Though only entering her second year of business, she’s concerned about taking on more debt to continue operations.
“It’s more of the day-to-day (expenses) that’s most challenging — getting the rent paid and hoping that I’m feeding my kids,” said Carrel, 53, who previously worked as an art teacher at various studios across the city. “Hopefully everything will pick up so that I’m not so stressed and I can keep this up beyond the three years. This is my retirement, essentially.”
Compared to other businesses, small companies bore the brunt of the pandemic and many are now in trouble as they struggle to regain their footing, said retail analyst Bruce Winder.
“They were closed while some of the big box stores were allowed to stay open and were used as the optical demonstration that the government was shutting things down,” he said.
Small business bankruptcy numbers were at a two-year high in March, with 318 small business insolvencies reported that month, according to the Office of the Superintendent of Bankruptcy. But the CFIB said the figures do not show the full extent of small business closures across the country, noting many owners simply stop operating instead of proceeding with the bankruptcy process.
In uptown Toronto at Eisenberg Sandwiches, owner Boaz Rachamim says inflation, especially rising gas prices, has impacted his business’s post-pandemic recovery. His costs are increasing, but he’s worried about raising menu prices and possibly turning away customers.
“Maybe they don’t have unlimited dollars to spend an extra eight or nine per cent per order,” said Rachamim, who opened the business last year. “That’s been a challenge for the last few months.”
James Rilett, central Canada vicepresident at Restaurants Canada, said though most consumers feel comfortable returning to in-person dining, many are eating out less often to rein in expenses due to the rising cost of living.
Many restaurants that experienced high debt loads during the pandemic are now facing slower sales. “We have a double whammy,” said Rilett.
According to the CFIB report, nearly three-quarters of small businesses took on extra debt as a result of the pandemic. Of all 2,275 businesses surveyed in June, 40 per cent hadn’t repaid anything yet, “presumably because they’re not in a solid enough financial position to do so,” the report stated.
This summer’s nationwide labour shortage is also deeply hurting the restaurant industry in what was supposed to be a period of recovery, said Rilett, noting many establishments have been forced to reduce their hours or close certain days of the week due to staff shortages.
The lack of skilled and unskilled labour were the top two factors preventing businesses from returning to normal, pre-pandemic sale and production levels, the CFIB report found.
Approximately 52 per cent of enterprises reported a skilled labour shortage in June, while 39 per cent said there was a shortage of unskilled or semi-skilled workers.
The CFIB report is calling on the federal government to increase the forgivable portion of the Canada Emergency Business Account loan to at least 50 per cent. Currently, the loan forgiveness rate is 33 per cent (up to $20,000), if the balance is paid on or before Dec. 31, 2023.
“Given the current situation with inflation and the supply chain challenges, governments have to pay attention to keep the costs of doing business affordable in Canada,” said Gaudreault.
While the request to increase loan forgiveness for small businesses is a “fair ask,” the government should exercise due diligence if they roll out any new support, said Winder, noting there is little appetite for that given the lack of financial aid available for individuals.
“Some businesses might be heading toward the exit no matter what and to throw good money after bad money doesn’t make sense,” he said.
“I know that sounds ruthless and less democratic, but you really have to look at each business individually and determine whether there they are going to be a going concern or not.”