Canadian businesses are at risk of insolvency — here’s how insurance factors in

In Canada, corporate insolvencies have noticeably increased year over year, but brokers can step in to assist their clients with cash flow management and risk mitigation solutions, one expert shares.

Insolvencies, defined as a business’s inability to abide by their financial contracts, climbed 20% or more from 2019 to 2024 in Canada, Marsh’s Political Risk Report 2024 shows. And in 2023 Q4 alone, insolvencies climbed 35%, says Ioana Arnautu, national trade credit practice leader, Marsh Canada.

Government-issued pandemic loan repayment is underway, but many businesses never fully got their financial footing back post-pandemic. When coupled with increased operating costs, it’s leaving businesses on rocky ground.

“A lot of these companies have had support from the government in the past, and during the pandemic, there’s been a lot of subsidies,” Arnautu says. “And once those subsidies have stopped and they have to continue paying their rent, their wages for their employees, they’re starting to go down towards insolvency.”

Bankruptcy, on the other hand, marks the process where a corporation legally declares the inability to pay their debts. And that, too, has increased 41.4% year over year, particularly at consumer-facing operations.

“We’re talking about healthcare, restaurants, real estate and consumer goods; those have been the highest bankruptcies that have been filed,” says Arnautu. “The main challenges have been higher input costs, wage costs and debt servicing costs.”

Canada’s seen a couple major bankruptcies in recent years — most notably, Nordstrom and Target. “That can affect, especially the smaller companies…quite badly, and they can go bankrupt because they haven’t received money for their own supplies,” says Arnautu.

And Canada can expect to see an even higher increase in bankruptcies going forward.

“A lot of corporate debt is actually going to come due in 2025, which is always going to have an even bigger impact on these companies that are struggling right now,” she says. “Because of the higher interest rates, they’re going to have trouble trying to get that support from their financial institutions that are supposed to help them with those loans.”

That said, there’s a good chance either a client or their supplier may be at risk of insolvency or bankruptcy. That’s where insurance solutions can come in handy, Arnautu explains.

For example, if a client’s supplier is dealing with insolvency and is no longer able to provide the client with their products, advanced payment guarantee provides insurance against delayed or non-delivery of goods. Under this policy, the payment will be returned to the buyer if the supplier does not complete their obligations to deliver the required goods.

There’s also trade credit insurance, which covers bad debts arising from customer insolvency. Trade credit allows businesses to purchase goods or services from suppliers and delay payment for an agreed-upon period, typically 30 to 90 days. It can provide businesses with more flexibility in managing their financial obligations and mitigate the impact of delayed or lost payments from insolvent customers.

“By having a trade credit policy in place our clients and our suppliers are able to provide longer terms of payment which makes them a lot more competitive in the market,” says Arnautu. Prudent, as there’s plenty of supplier competition.