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How interest rates affect small businesses in Canada

(Photo Credit: iStock.com/DragonImages)

Small business is big business in Canada. According to Statistics Canada, small businesses account for 97 per cent of businesses across the country. They contribute about 30 per cent of their respective province’s GDP and employ over 70 per cent of Canada’s total private workforce.

Despite playing such an integral role in this country’s economy, small business are the most susceptible to economic fluctuations – especially those tied to interest rate changes.

“Rate changes have an impact on small businesses because [small businesses] have [fewer] sources of cash and harder times getting money,” says Rudy Fischer, CPA, CMA and business consultant with RK Fischer and Associates.

“Anyone who relies on...any kind of funding will feel the impact of an interest rate increase, particularly if they have a lot of debt.”

StatsCan data released in June 2016 shows that just over half of the small to medium-sized enterprises (SMEs) in Canada sought external financing, with more than 80 per cent of start-ups using personal financing to fund their new businesses — that’s a lot of small businesses at mercy of interest rates.   

'An interest-rate increase comes straight out of profits'

Manufacturers, construction companies and any businesses that  hold a large amount of inventory feel the sting of interest rate hikes the most, because these types of businesses have  upfront costs that can’t be recouped.

“The cost [of an interest rate increase] comes straight out of profits,” says Fischer. 

For example: a construction company buys all the materials for a project in advance, but gets paid for a job when it’s complete. They can’t charge a client more if interest rates change halfway through a build.

Last September, US Federal Reserve chair Janet Yellen announced that an increase in the American key interest rate is coming.

Pierre Cléroux, chief economist for the Business Development Bank of Canada, says that a US interest rate increase itself will have little impact on small businesses in Canada, but the downward pressure it puts on our already-volatile Canadian dollar is another matter.

Higher interest rates in the US mean the Canadian dollar may fall, and that’s bad news for businesses that import from the US (and other countries that trade using the greenback), like wholesalers and retailers.

Low loonie highs

Clearly, a low dollar isn’t great for anyone who buys products or services from the US, but it’s good for those who sell to the south – like seafood exporters, car part makers, those who sell professional services and those in the tourist industry. A low loonie makes it cheaper for other countries to buy our wares. Right now, about 11 per cent of SMEs in Canada export, which accounts for 25 per cent of all our exported goods and services.

A low dollar can also force Canadians to shop locally and encourage Canadian businesses to source local producers. Once shipping and exchange rates are factored into the cost of items from the US, they may be more expensive than products found right here at home.

Despite the unknowns, what-ifs and impacts of interest rate changes, Cléroux says that now is a good time for small businesses in Canada.