Amanda Munday, founder and CEO of The Workaround, at the office in Toronto on March 10. Ms. Munday is closing her small business in September.Tijana Martin/The Globe and Mail
Amanda Munday has decided to call it quits.
The owner of the Workaround – a combined co-working office space and daycare in Toronto’s east end – posted a letter on her LinkedIn page Wednesday announcing that her business will permanently close in September.
“It’s been an excruciating call to make, but it’s the only one,” she wrote.
It’s a sad end to the roller-coaster story of Ms. Munday’s business, which we have been following periodically in this column since the early days of the pandemic. Those three-plus years have been deeply challenging to both her entrepreneurial will and her personal finances. Ultimately, the weight of heavy pandemic debts, rising interest rates and a shifting business environment became too much.
“It’s consecutive challenges that have happened, that are relentless and insurmountable,” Ms. Munday said over the phone on Wednesday. “There’s been no time when we haven’t faced huge roadblocks.”
There is growing statistical evidence that more and more Canadian entrepreneurs are hitting a similar wall.
On Tuesday, Statistics Canada reported that in March, nearly 3,000 more companies closed their doors than opened them. It was the second month in a row that closings outnumbered openings.
This isn’t the kind of thing that happens very often. In fact, this is the first such two-month losing streak since the early months of the COVID-19 pandemic. In a typical healthy, growing economy, business openings modestly outnumber closings; a shrinking count of active businesses is typically associated with recessions.
Monthly figures from the Office of the Superintendent of Bankruptcy, a federal agency, have also shown an alarming increase in business failures. Insolvencies in May were up 59 per cent from the same month a year earlier; over the 12-month period ended in May, business insolvencies were up 39 per cent compared with the prior 12 months.
While the figures are discouraging, they shouldn’t be surprising. The sharp rise of interest rates over the past year has cranked up the pressure on indebted businesses – many of which were forced to considerably increase their debt loads to stay afloat during the pandemic’s public-health shutdowns and restrictions.
For new ventures, borrowing costs have soared and access to capital has become increasingly challenging. It’s adding up to more businesses deciding to close shop, and fewer entrepreneurs taking the plunge and launching new ventures.
The longer high rates remain in place, the more we’re seeing their impact weighing on the health of existing businesses and the formation of new ones. And with a deadline approaching at the end of the year for companies to pay back their pandemic loans from the federal government under the Canada Emergency Business Account program, we could see more discouraging statistics, and hear more stories similar to Ms. Munday’s, in the months to come.
“We know that bankruptcies are on the rise and stresses are growing. We also know from small-business surveys that a lot of small companies will find it difficult to pay back their COVID loans at the end of this year,” said former Bank of Canada governor Stephen Poloz, who has long been a proponent of business-formation figures as a key indicator of where the economy is headed.
Notably, the Statscan figures indicate that while the number of businesses closing in March was roughly in line with the pace we saw through the second half of last year, the number of business openings has been declining markedly. Openings in the month were the lowest in nearly two years, and were down 13 per cent from a year earlier. It’s a sign of how big a barrier borrowing costs and credit constraints have become to the formation of new businesses – a critical component to sustaining a growing economy.
“Credit constraints become increasingly important as a transmission mechanism as rates rise – banks take higher provisions, add tighter covenants, and old covenants get broken. It is a cumulative process quite apart from the cost of borrowing,” Mr. Poloz said.
“To get a small-business loan right now is incredibly challenging; if I even got it, it’s so expensive,” Ms. Munday confirmed. “I can’t see any world in which any independent entrepreneur can start a small business without having a ton of liquid cash in hand.”
Ms. Munday can’t envision applying her own entrepreneurial instincts to a new venture once she winds up the Workaround.
“I need to do something else,” she said. “I need a job.”
Indeed, the job market is a key place where a contraction in the country’s number of active businesses will have its biggest impact. Closings will increasingly eliminate jobs, while the stalling of openings will reduce creation of new positions. If the business-formation and failure figures become a more entrenched trend, we can expect to see some meaningful loosening of the current tight labour markets in the coming months.
“I would continue to watch this [statistical] series for confirmation of growing underlying stress, as the effects of higher interest rates work their way through the system,” Mr. Poloz said. “But it would not be surprising if it turns out we have seen the peak in active businesses for this cycle.”