Canadian small businesses will be able to ride out the worst of the deepening global financial crisis, but will have more difficulties getting credit in the short term, analysts predict.

Benjamin Tal of CIBC World Markets says higher credit costs and the deteriorating economic situation south of the border will combine to hit small businesses here.

"Credit is clearly a factor that will be entering the small business domain, because the price is relatively high," says Tal.

Central banks, including the Bank of Canada, cut their interest rates last week in an effort to unclog credit markets and stave off a global recession.

"The rate move was a dramatic action to backstop what was verging on an outright confidence crisis," said RBC Capital Markets currency strategist David Watt.

"Without doubt, the financial contagion had morphed from an epidemic of concern into a pandemic-like crisis, with the associated potential for outright irrationality."

But Tal predicts Canadian lending costs will eventually come down as the U.S. government continues to struggle with what is now emerging as a potentially lengthy recession.

Photo courtesy of the Canadian Federation of Independent Business
CFIB chief economist Ted Mallett says a survey released last week of small-business owners reflects a growing pessimism in the economy.

"In the initial term, small businesses are clearly casualties of this crisis because of the very widespread and, therefore, more expensive borrowing costs," says Tal.

"Secondly, the crisis is making the cyclical slowdown even more severe, and Canadian small businesses are definitely feeling the pain."

However, Tal also believes small businesses will "be the first to get out of the gate" and will actually outperform large businesses when the economy starts to recover.

Dave Wilkins, Toronto-based Scotiabank's director of small business, says smaller Canadian companies that cater to consumers are already feeling the hit of the drop in U.S. demand.

"If you go across the country, it has different effects," he says.

He predicts Western Canadian energy companies that have enjoyed the past benefits of high commodity prices will continue to do well, but companies that serve the U.S. housing industry will feel the pinch.

Small businesses that depend on the declining manufacturing sector are already starting to look more to global marketplaces to find new customers, while others are controlling costs and downsizing.

"The temptation is to look at the challenges that this creates," says Wilkins. "On the other hand, small business continues to drive the Canadian marketplace."

Wilkins says Scotiabank is expanding its small-business lending programs and is not concerned about the U.S. situation because the Canadian financial system continues to be extremely strong.

"The reality of the cycle is that it has a downside and it has an upside," he says. "Small businesses in Canada have been responding to those types of realities since the country was conceived, I suppose."

The risk, he says, is in over-reacting to the U.S. financial-sector problems. He advises small firms to review and adjust their business plans annually and continue to seek out good resources and advice.

"(Small businesses') ability to deal face to face (with customers) in key parts of the country, that's their strength," says Wilkins.

Meanwhile, pessimism is growing among Canadian small-business owners, according to the Canadian Federation of Independent Business (CFIB).

CFIB chief economist Ted Mallett said that although the balance of opinion has become more negative, pockets of strength remain.

A CFIB survey shows five per cent of business owners are looking to perform "much stronger" in the next 12 months, while 23 per cent are expecting to be "somewhat stronger.”

Mallett said only six per cent expect to be "much weaker" in 12 months, with 31 per cent of business owners expecting to be "somewhat weaker."

"Growth may be paused for the moment, but longer-term performance of small- and mid-sized enterprises will depend on how markets settle out over the next few weeks," he said in a statement.

Brian Bonney, a B.C. provincial affairs director for the CFIB, agrees the U.S. situation continues to erode Canadian confidence.

"It's definitely shown us this (lack of confidence) is now trend-setting," says Bonney. "A big impact is what's happening south of the border."

Bonney says many small-business owners are now delaying decisions to borrow money for expansion projects, because credit costs are higher and applications take longer to process because of new rules imposed by banks. He predicts the situation will deter some small-business operators from seeking loans.

Jock Finlayson, executive vice-president of policy for the Business Council of British Columbia, says Canadian financial institutions have held up well despite the turbulent times. But the crisis adds another level of uncertainty to a Canadian economy that has almost flattened.

Finlayson predicts business-to-consumer activities will remain strong because household credit, for items like mortgages and loans, continues to grow at a rate of eight to 10 per cent.

"On the business side, given the turmoil that the U.S. is going through and given the weaker growth profile for the world economy, I think a lot of business decisions are going to be postponed up here on our side of the border - for the moment," says Finlayson.

"In other words, there is a spillover effect on the business side and, at the margin, it's probably become tougher for companies here to access credit and our accessing has probably gone up in price."

Analysts say most Canadian small businesses will have an easier time riding out the storm than their U.S. counterparts because Canada's economic fundamentals are healthier.

But Finlayson warns: "Anybody in Canada who is in the business of selling their goods and services to Americans has got to be somewhat concerned about the very shaky outlook for the American economy at the moment.

"At the end of the day, this isn't just about some banks that are facing troubled times. Underlying this is a weak economy."

"This is an unprecedented development in modern times, so it's difficult to know where it's all leading."

- with files from The Canadian Press (Monte Stewart can be reached at monte@businessedge.ca)