Credit stress concentrates in Canada’s SME sector as bank delinquencies rise

Newly released data pointed to a more concentrated, and uneven, buildup of credit stress across Canada’s small business sector, with clear implications for commercial lenders, trade credit underwriters and credit insurers.

Equifax’s Q4 2025 Market Pulse showed financial trade delinquencies (bank loans, business credit cards and lines of credit) rose 9.02% year over year to 3.52% nationally, even as industrial trade delinquencies (payments to suppliers and trade partners) fell 25.52% to 4.65%. The Canadian Small Business Health Index declined 2.4% year over year, signaling weaker resilience as debt loads climb and stress becomes more concentrated in specific sectors and regions.

Jeff Brown, head of commercial solutions at Equifax Canada, said the pattern indicated “more concentrated pressure,” with day‑to‑day supplier payments stabilizing but leverage built up over the past two years weighing on service and rate‑sensitive sectors. He noted that when stress narrows into particular industries and geographies, it can tighten lending conditions and increase the risk of localized business setbacks.

Credit stress shifting into bank channels

The divergence between financial and industrial trades suggests many businesses are still prioritizing payments to suppliers while falling behind on bank‑related obligations. Industrial trades improving while financial trades deteriorate means supply chains are, for now, being kept current, but lenders and card issuers are seeing more of the emerging stress.

This points to growing pressure in term loans, cards and lines of credit, particularly among more leveraged small and mid‑sized enterprises. The improvement in industrial trades provides some near‑term comfort on payables risk, but it also implies that more of the credit deterioration is sitting on lenders’ balance sheets rather than in trade flows, according to the report.

Meanwhile, Equifax’s Q4 2025 consumer Market Pulseshowed a similar “two‑track” pattern on the household side, with total consumer debt rising to $2.65 trillion and non‑mortgage delinquencies climbing in rate‑sensitive segments, reinforcing the message that higher rates and cost pressures are still working through both personal and commercial credit.

Provincial hot spots and sector splits

Ontario recorded the highest financial trade delinquency rate in the country at 3.88%, up 12.90% year over year. Pressure was most visible in real estate, rental and leasing, where delinquencies jumped 24.5%, and in finance and insurance, up 21.3%. Prince Edward Island posted the fastest acceleration nationally, with financial trade delinquencies up 32.78% year over year.

Quebec was the outlier, recording a 1.29% year‑over‑year decline in financial trade delinquencies, supported by comparatively stronger employment growth and the lowest provincial unemployment rate.

Trade credit, bonding and D&O underwriters are likely to pay close attention to Ontario‑based real estate and financial firms and to smaller Atlantic markets such as PEI, where rising delinquencies can more quickly translate into claims in a thinner economy, according to the data. Quebec’s relative resilience, by contrast, may support more stable loss experience for local portfolios in the near term.

Rising debt, but signs of restructuring

Average business debt rose 16.9% year over year to $30,035. Newly established firms under 12 months old drove much of the increase, with balances surging 64%. Despite higher leverage, the number of businesses with at least one missed payment fell 11.09% year over year to 282,257 in Q4 2025.

The credit mix points to restructuring rather than simple overextension. Installment loan balances increased 21.9% year over year to $132,101, while credit card balances declined 5.0% and lines of credit fell 14.7%. Businesses appear to be locking into more structured term borrowing and reducing revolving exposure, likely reflecting tighter underwriting on on‑demand facilities and a preference for amortizing debt that is easier to manage and model.

This pattern broadly matches national insolvency statistics. Business insolvencies surged in 2024 to their highest level in 15 years, up 28.6% from 2023, driven by construction, transportation and accommodation and food services, but filings eased in parts of 2025 as firms refinanced and restructured.

For insurers, higher leverage and more term debt can increase severity when insolvencies do occur, affecting trade credit, surety, commercial property (business interruption) and some financial and professional lines, even if headline delinquency counts are not yet spiking.

Manufacturing stabilizes as services strain

Industrial trades improved nationwide, with manufacturing leading the shift. Manufacturing delinquencies dropped 32.2% year over year, and the sector’s health index rose 0.7% annually and 6.1% quarter over quarter.

That improvement is consistent with macro data showing manufacturers benefiting from relatively resilient US demand, a supportive exchange rate at times and some easing in supply‑chain bottlenecks. It also suggests that prior de‑risking is feeding into better payment performance.

By contrast, service‑heavy and interest‑sensitive industries continue to face higher borrowing costs and softer consumer demand. The 2.4% year‑over‑year decline in the Canadian Small Business Health Index captured broad‑based softening in sentiment, margins and cash‑flow resilience among small and mid‑sized firms in sectors exposed to discretionary spending and financing costs.

From an insurance perspective, that split matters. Manufacturing’s improved payment behavior and stronger health index readings are a relative positive for property, business interruption and trade credit exposures in that sector. Weaker service segments – particularly those in real estate, hospitality, discretionary retail and non‑bank finance – still pose longer‑term viability questions for SME portfolios.

Brown summed up the divergence by noting that the business climate is no longer “rising or falling together,” but separating into firms that are improving cash flow and leverage and those more exposed to rate sensitivity and consumer softness. Credit models, industry appetites and capacity deployment will need to reflect those emerging fault lines rather than relying solely on national averages as the year unfolds.

By Josh Recamara