Most of the businesses that have failed during the Covid-19 pandemic were already struggling before the crisis hit, according to new research from Statistics Canada.
In a study examining trends in business insolvencies during the pandemic, the national statistical agency noted that, unlike previous economic crises, the disruption created by the pandemic has been met with a decline in business failures.
“At the height of this century’s previous economic shocks, insolvencies rose by 10% or more,” it reported.
However, insolvencies dropped by “almost one-third year over year” in the initial aftermath of the pandemic crisis, and have stabilized in the months after that.
The drop in insolvencies reflects the unprecedented financial support provided by the federal government to combat the economic effects of the pandemic, and the plunge in interest rates which means low borrowing costs for business.
According to StatsCan, its study “suggests that businesses that filed for insolvency in 2020 were already in a precarious financial situation before the Covid-19 pandemic. Even with the help of government programs, these corporations decided to file for insolvency.”
It also noted that businesses may be “waiting to see whether more government aid will be forthcoming and whether they will be able to manage their debt levels before filing for insolvency.”
To that end, StatsCan said that, in the third quarter, 43.9% of businesses reported that they were unable to take on more debt.
“This suggests that insolvencies may increase in the coming quarters as the financial position of businesses deteriorates,” it said.