A Canadian business owner may operate anything from a small café to a family-run store. These businesses function smoothly until interest rates rise, increasing loan costs and reducing consumer spending. As customers cut back on purchases, business survival becomes uncertain. The potential upcoming interest rate hike poses a significant threat to many Canadian enterprises. This article explores 23 Canadian businesses that could disappear if interest rates rise again.
Why Interest Rates Matter
Interest rates determine the cost of borrowing. Businesses rely on loans, mortgages, and credit lines to fund operations. When interest rates increase, businesses face higher loan payments, reducing cash flow and sometimes leading to staff layoffs or closures. Customers also reduce spending due to rising monthly expenses. Canadian businesses face significant challenges if the Bank of Canada raises interest rates further, especially after the recent decrease to 2.75%.
Small Retail Stores
Small retail stores, such as clothing boutiques, toy shops, and gift stores, rely on discretionary spending to remain profitable. When interest rates rise, customers cut back on non-essential purchases, leading to lower sales. Many of these businesses also rely on loans to stock inventory, and higher borrowing costs could drain their finances.
Cafés and Small Restaurants
Coffee shops and small eateries depend on daily customer visits. However, during periods of high interest rates, people dine out less to save money. Since these businesses operate on thin profit margins and often have loans for rent and equipment, rising costs put them at risk of closure.
Construction Companies
The construction industry depends on large financial loans to acquire materials and hire workers for residential and commercial projects. Higher interest rates make borrowing costly, delaying or canceling projects. The industry saw a 37% increase in insolvency cases, highlighting its fragile state.
Real Estate Developers
Developers take out significant loans to build condominiums and housing projects. Higher interest rates increase loan payments and reduce consumer demand for mortgages, leading to slower sales. In 2024, real estate insolvencies surged tenfold compared to 2023 due to these pressures.
Car Dealerships
Most car buyers finance their purchases through loans. Higher interest rates increase borrowing costs, reducing demand for vehicles. Dealerships also take loans to maintain inventory, making them doubly affected by rising rates.
Furniture Stores
Furniture purchases are often made through credit financing. Rising interest rates make consumers hesitant to spend on home improvements, leaving stores with excess inventory and mounting debt.
Home Renovation Businesses
Homeowners typically renovate using cash or affordable loans. As mortgage and home equity loan costs rise, people delay renovations, causing a decline in business for contractors and remodelers.
Travel Agencies
Vacations are a luxury, and travel agencies suffer when families cut back on discretionary spending. These businesses often rely on loans during slow seasons, making them vulnerable to high interest rates.
Hotels and Inns
Travel declines during economic downturns. Small hotels rely on loans for maintenance and payroll, and higher borrowing costs can leave rooms vacant and bills unpaid.
Event Planners
Budget cuts lead to fewer weddings and parties. Event planners who finance venue rentals or catering services with borrowed capital risk financial trouble if rates continue rising.
Gyms and Fitness Centers
When money is tight, gym memberships are among the first expenses people cut. Many fitness centers took out loans during the pandemic, and rising interest rates may make repayments unmanageable.
Beauty Salons
Haircuts and spa treatments are non-essential expenses. As clients reduce visits, small salons with outstanding loans struggle to cover rent and staff wages.
Toy Manufacturers
Toy production requires substantial upfront investments, often financed through loans. When parents cut back on toy purchases, manufacturers face difficulties repaying debt.
Bookstores
Independent bookstores already struggle against major online retailers like Amazon. Higher interest rates reduce their slim profit margins, especially when financing inventory or rental costs.
Jewelry Stores
Luxury items like jewelry are among the first purchases to decline during economic uncertainty. Jewelers, who invest heavily in inventory, risk bankruptcy when sales drop.
Small Manufacturers
Manufacturers of metal and industrial products depend on bank loans for equipment and raw materials. Increased borrowing costs, combined with declining demand, create financial strain.
Transportation Companies
The failure rate among trucking and delivery firms increased by 28% in 2024. Higher interest rates could force more transportation businesses to abandon operations due to unaffordable truck and fuel costs.
Small Oil and Gas Producers
Western Canada’s oil sector faced declining prices in 2024. Higher interest rates would further increase loan expenses, pushing some small producers into bankruptcy.
Radio Stations
Radio stations rely on advertising revenue, but businesses cut ad budgets during economic downturns. Loan-carrying radio stations face increased financial stress if interest rates rise.
Loan and Cheque-Cashing Services
These companies provide financial aid to borrowers in need. Rising interest rates create two challenges: they pay more for their own borrowing, and customer defaults increase, reducing profitability.
Coal Mining Companies
Coal demand has been falling, and price volatility adds uncertainty. Higher interest rates make loan repayments more difficult, potentially pushing some mining companies into bankruptcy.
Accommodation and Food Services
Restaurants and motels saw a 32% increase in insolvencies in 2024. Higher interest rates could further reduce customer spending while increasing loan expenses, worsening financial struggles.
Non-Essential Online Retailers
Online businesses selling niche products, such as fashion and gadgets, rely on impulse buys. Higher interest rates reduce consumer spending, making it harder for debt-laden e-commerce businesses to survive.
Why These Businesses Are Vulnerable
All these businesses share common vulnerabilities. They rely on discretionary spending, which declines when interest rates rise. They also depend on loans for operations, making higher borrowing costs difficult to manage. Many operate with limited reserves, leaving them financially fragile. Business insolvencies in Canada rose by 35% in early 2023, the highest level in 36 years, proving the already precarious state of these enterprises.
What History Tells Us
Between 2022 and 2023, the Bank of Canada raised interest rates from 0% to 5% to combat the 8.1% inflation. The result was declining sales and rising debts, particularly for retailers and builders. As businesses struggled to repay pandemic-era loans, insolvencies surged in 2024. If rates rise again to 2.75%, it could trigger another economic downturn with limited government support.
Could These Businesses Survive?
Some businesses may survive, while others may not. Large chains with cash reserves can outlast smaller competitors. Adaptation strategies, such as offering takeout services or reducing debt, may improve survival chances. However, many businesses depend on low interest rates and strong consumer spending to remain viable.
What You Can Do
Business owners should consider fixed-rate loans to stabilize expenses and cut unnecessary costs to build financial flexibility. Consumers can support local businesses now to help them endure future economic challenges.
Conclusion
For many Canadians, rising interest rates feel like a looming storm threatening their economic stability. Increased borrowing costs could force the closure of 23 types of businesses, from cafés to construction firms. Beyond financial concerns, job security, community well-being, and personal aspirations are at stake. As 2025 unfolds, understanding these risks is essential for navigating uncertain economic conditions.
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