The Lifeblood of Canada: How Small Businesses Can Survive (and Thrive) Under Current Economic Conditions

Introduction 

The state of independent business ownership has undoubtedly been challenged over the last two years. Inflation is at a multi-decade high, the Canadian dollar remains under pressure, the economy is experiencing ongoing supply chain challenges, and we are just about to enter a recession. This doesn’t paint the best picture for the future of small business, which makes up around 98.1% of all employer businesses in Canada—employing over 10.3 million individuals. A new Léger poll conducted by Caary found that 70% of small-to-medium businesses (SMBs) are currently having to put their personal and family finances at risk to fund their business by either continuing to rely on a personal credit card for business expenses or providing a personal guarantee to access corporate credit.

Since SMBs are taking on more personal risk to fund their own business, reliable access to credit and tools to facilitate cash-flow management are more important than ever. The systematization of open banking in Canada will provide new pathways for SMB lenders to expand access to credit and better serve their customers. In addition, a variety of fintechs have developed innovative solutions to yield better returns and increase operational efficiency for SMBs. This article will assess the current state of the Canadian economy, provide background on how open banking can be leveraged to support the small business sector, and serve as an overall guide amid this period of uncertainty. 

The State of Small Business in Canada

Small and medium-sized businesses play a vital role in the Canadian economy. With so many individuals’ livelihoods depending on the financial health of small business, industry experts must understand the challenges and adverse impacts these businesses are currently navigating. According to the results of Statistics Canada’s 2022 Survey on Business Conditions—an assessment of the current business environment in Canada—the following challenges are expected to impact small businesses the most: 

• Negative impact on sales (37 per cent)
• Managing margins and profits (33 per cent)
• Overall business spends (33 per cent)
• Managing cash flow (27 per cent)

On top of these challenges, small businesses often don’t get access to credit due to the overhead attributed to conventional credit scoring systems. To get through the pandemic, many business owners utilized emergency benefit programs, such as the government-provided Canada Emergency Business Account (CEBA). 56% of respondents reported to Equifax that they felt they had enough credit from the government to meet their 2021 Q4 needs; 77% indicated that they had enough credit from their suppliers, especially those who had been in business for three years or more.  

According to a 2020 report by Accenture, 42% of SMEs believe alternative providers can offer a better service than traditional banks. This level of trust for fintech lenders has increased tremendously, as Bank of Canada rates continue to soar and alternative lenders maintain open access to credit for all Canadians.  With small business owners facing higher interest rates and longer decision-making times from incumbent banks, alternative lenders must adapt by using data driven models that take into account business data such as financial statements, cash flows, and POS transactions, as well as behavioral data that highlight a business’ spending pattern and loan utilization.

Independent business owners deserve better access to financial products and services.

A Deep Dive into the Numbers 

A plethora of data can be used to analyze the current challenges and key economic takeaways for the SME space. 403 small businesses were polled in a new Léger study conducted by Caary, in partnership with the Canadian Lenders Association and Xero, in order to get a full picture of the state of small business. The graphics below are a candid representation of how small businesses have struggled in Canada’s post-pandemic economy: 

• 57% of SMEs say it’s currently challenging to manage cash flow – significantly higher than pre-pandemic (41%).
• 37% of those relying on personal cards use it for more than 40% of their total monthly business spend.
• 35% found it difficult to access business credit and 30% found it difficult to access key financial products and services.
• 41% of business leaders say that they would consider installment lending to help manage the cash flow for their business.

The Case for Open Banking

Given the market conditions expanded upon above, there is a clear need for a safe, alternative option for small businesses to improve their operations and access to capital. Like so many modern solutions, digital and technological optimization can be leveraged to create more successful outcomes for a wide range of Canadian businesses. An effective open banking regime would be just the necessary step in order to more adequately serve this sector. 

Open banking is a regulatory framework to enable the management of finances, automate transactions and can facilitate new loan applications. No singular open banking system looks quite the same, but rather exists in different forms in Britain, Australia and Brazil, among many other areas. Approximately 87% of countries already offer some version of open banking. A made-in-Canada open banking system is clearly overdue, and the one already in development is projected to roll out by January 2023. 

Once open banking is effectuated in Canada, risks such as money laundering and fraud will decrease, and consumer ease and autonomy will increase. Furthermore, it’s likely that bank/fintech partnerships will become more common and mutual reciprocity in terms of data sharing will expand. 

Alternative Solutions

While the implementation of a Canada-grown system of open banking would undoubtedly benefit small business owners nationwide in the future, there are a wide range of best practices that small business lenders can adopt right now to ensure all Canadian businesses have the opportunity to thrive. Compared with pre-COVID days, the world today has better access to funding and new solutions. Take Caary, for example: Caary is a company intent on simplifying business spend and expense management by providing unlimited virtual and physical cards, receipt capture, accounting integration, and more. This is particularly helpful for small businesses, 64% of which continue to rely on a personal credit card for business expenses. Another 68% say this has created difficulties, most notably due to high interest rates, reconciling expenses at month-end and maxing-out credit limits.

Conclusion 

In a country where small business owners are scrambling for capital and resources, all the component parts of the financial services industry must come together to be an engine for growth. The small business sector stands to gain from the development of open banking as well as continued fintech innovation. With strong support for an open banking regime and expanded access to credit through supportive fintech offerings, the current economic conditions should be no barrier to the ability for Canadian SMBs to thrive.