Canadian small business owners turn to personal credit

Equifax Canada says many Canadian small business owners use personal assets and credit to support their companies, with business strain spilling into household finances.

One in four owners surveyed said they had been required to provide a personal guarantee to secure business financing, putting assets such as savings or a family home at risk. Another 21 per cent said they had applied for or opened a personal line of credit as a financial safety net for their business during the past two years.

The pressure appears especially acute for younger entrepreneurs. Among owners aged 18 to 34, 54 per cent said they had been required to provide a personal guarantee, compared with 15 per cent of those aged 55 and older.

A similar age gap appeared in credit line use. Equifax says 54 per cent of younger owners had applied for or opened a personal or business line of credit as a safety net, compared with 15 per cent of older owners.

Business strain

The most commonly cited challenge was finding or retaining customers, named by 53 per cent of respondents. Rising operating costs followed at 48 per cent, while 42 per cent pointed to workload, stress or mental health, 38 per cent cited competition, and 30 per cent identified a lack of capital or cash flow.

Equifax also used its own credit data to argue that business owners are relying more heavily on personal borrowing than other consumers. According to the company, business principals carry personal credit balances that are 105 per cent higher than the average consumer, have 31 per cent higher credit utilisation, and manage 44 per cent more credit trades.

Business owners are also making greater use of revolving credit and home equity lines of credit, Equifax says. That matters because using household borrowing to fund commercial activity can raise the risk that business problems will undermine personal financial stability.

"Running a small business has always involved financial risk, but these findings highlight how closely business and personal finances can become connected," said Jeff Brown, head of commercial solutions at Equifax Canada.

Among the smaller group of owners who had used a personal line of credit or provided a personal guarantee, 45 per cent said it had affected their personal finances. Reported effects included reduced personal credit availability for 20 per cent, greater difficulty qualifying for a car loan for 20 per cent, difficulty obtaining other personal credit for 15 per cent, and difficulty qualifying for a mortgage for 13 per cent.

Brown said the data showed the extent of that dependence. "This data clearly demonstrates a disproportionate dependence on personal credit to secure timely funding and sustain their operations. To put this in perspective, if businesses are relying on HELOCs to sustain operations - and they are doing this amid challenging real estate market fluctuations - this could put them in a difficult situation. When owners are using personal credit or pledging personal assets to support their business, the financial health of the company can have implications well beyond the business itself," Brown said.

Credit awareness

The survey also pointed to uneven awareness of business credit reporting. Just over half of those surveyed, or 54 per cent, said they had checked their business credit report at least once, including 34 per cent who had done so within the past 12 months.

At the same time, 15 per cent said they did not know how to access their business credit report, while 10 per cent said they were unaware their business had a separate credit report. Nearly two-thirds (64 per cent) said they would be interested in monitoring their business credit score through their bank's commercial banking platform.

Interest was stronger among owners already engaged with their credit information. Among respondents who had checked their business credit report within the past year, 86 per cent said they would be interested in accessing their score through their bank.

Younger owners were also more likely to want that access. Equifax says 74 per cent of owners under 55 expressed interest, compared with 52 per cent of those aged 55 and older.

Brown linked younger owners' greater reliance on guarantees and personal borrowing to the range of pressures they face. "The findings suggest that younger business owners are managing several pressures simultaneously: maintaining customers and revenue, absorbing higher costs and, in some cases, finding additional financing to bridge cash-flow gaps," Brown said.

Broader commercial credit trends in Canada have also shown strain among businesses as they make difficult choices about where to allocate available cash, Equifax says. The latest survey adds a consumer dimension to that picture, suggesting those choices increasingly affect owners' personal balance sheets as well as their companies.

Brown said access to clearer information could help owners navigate those pressures.

"You cannot manage what you cannot see," he said. "Understanding a company's commercial credit profile can help business owners better understand how lenders may view their business and the financing options that may be available to them. Making that information easier to access could help owners make more informed financial decisions."