Caary Capital, a Toronto-based fintech that provides credit cards to small and medium-sized businesses, surprised many of its customers last week with an email saying it was temporarily lowering their credit limits. 

Caary imposed the new limits on small and medium-sized enterprises, or SMEs, because of the “volatile nature of the current economic conditions prompting a high-risk environment for credit lenders,” the emails read. The company asked customers with a balance exceeding the new limit to pay off the outstanding balances. 

“These changes are due to the current macroeconomic and credit card market conditions, higher cost of short-term funds for SMEs after rapid rate hikes in this still inflationary environment,” Jason Sawyer, co-founder and CEO of Caary, told The Logic. “Multiple Caary data partners and SME specialists and partners have indicated that SME delinquencies continue to pose a risk, which is not expected to ease in the near term.”

One of Caary’s SME clients, whom The Logic agreed not to name so they could speak freely about financial matters, said the company cut its $20,000 credit limit to $5,000. Given their long credit history, they said, it felt like a “slap in the face.”

(The Logic, also a Caary customer, had its credit limit similarly reduced.)

Caary isn’t the only company offering SMEs financial services that’s rethinking its approach to risk. With rising interest rates and inflation pressuring both fintechs and their SME customers, some lenders are changing their offerings. 

Jeff Brown, head of commercial solutions at credit bureau Equifax Canada, said SMEs now face a greater risk of insolvency because they’re taking on approximately 22 per cent more debt than last year. That could lead to more delinquencies, collections, legal action and bankruptcies. 

The number of new credit card accounts Canadian small businesses have opened is also up 67 per cent, Brown said, which he called concerning, because many of these firms are relying on revolving debt rather than paying cards off fully each cycle. 

Sawyer said Caary is itself a small business. (Since its founding in 2019, it has raised $22.9 million total, according to Crunchbase.) And since its business is extending credit to Canadian SMEs, it’s more sensitive to loss than large institutions, he said, noting that its proprietary adjudication and risk models guide its customer credit limits. 

Sawyer wouldn’t confirm how many of Caary’s customers had their credit limits reduced, but said at least a quarter of its customers may have received the email. Most were unaffected because they already had lower limits, he said, and chose to make multiple payments in a billing cycle or pre-pay on their accounts.

Miami-based Jeeves, a fintech in the corporate credit card and cross-border payments business, decided five months ago to stop offering credit lines of less than US$10,000, disqualifying many of its small-business clients. 

Ron Benegbi, founder and CEO of Toronto-based fintech Uplinq, an assessment platform for small-business lenders, sent Jeeves a query after a declined purchase on his company credit card. Jeeves responded with an email saying his corporate-card limit was reduced to $0, he wrote on LinkedIn, and that he was no longer eligible for a Jeeves line of credit. “Never missed a payment. Never ran a high balance. Completely out of left field,” he wrote.

“Jeeves historically has been able to provide credit lines as low as $1,000 for certain smaller businesses,” read the email Benegbi posted. “The macroeconomic environment has drastically changed in the last year, making it increasingly difficult for us to offer such small lines of credit.”

Jeeves co-founder and CEO Dileep Thazhmon told The Logic the company made the change, which affected less than five per cent of its customers, because it wasn’t making enough money on small businesses. “As you move upstream, you start to make a little bit more revenue because you’re providing other services like cross-border payments. When the rates were zero per cent, it made a little more sense, because we’re not paying as much for the cost of capital.” 

Thazhmon added that Jeeves has a small team of 20 in Canada, so it’s more strategic to target a smaller group of companies generating the same amount of money or similar to what a wider net of companies might be generating. 

While some lenders are reining in their offerings, Cato Pastoll, co-founder and CEO of Toronto-based Loop Financial, told The Logic that his company “somewhat benefits” from this macroeconomic environment.

Traditional banks will typically pull back when the economy contracts or looks like it will, meaning they either cut the amount of credit they’re providing companies or they don’t approve those that previously may have qualified, Pastoll said. 

“In these types of credit conditions, that’s where the non-bank providers play an important role in helping companies get access to credit card products that they might not be able to access through traditional financial institutions,” he said. 

That’s not to say Loop, a cross-border banking platform that offers corporate cards, wouldn’t ever change an SME’s credit limit, he added. But such a decision would depend on the company’s performance rather than that of the overall economy. “We’ve been lending money to [SMEs] for over eight, coming up on nine, years now and we’ve seen some of the kinds of cycles that transpire and have set ourselves up to be in a position where we can provide capital in different market environments,” he said.  

In its emails to customers, Jeeves said it was “expediting efforts to build our prepaid corporate cards and prepaid Jeeves Pay,” which lets users send interest-free vendor payments. Both products launched in July. 

Around 40 per cent of Jeeves customers given the option to migrate to prepaid cards went that route, Thazhmon said.

Prepaid options have made up 10 per cent of the company’s revenue over the last eight weeks and are growing 30 per cent month over month, he said.

Caary currently doesn’t offer prepaid credit cards, but Sawyer said they’re on the company’s “road map.” With the economic headwinds, he said, “it’s becoming more of a priority.”

Correction: Caary Capital is based in Toronto, and has raised $22.9 million in total, according to Crunchbase. This story has been updated.