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Grim City Tattoo Club owner Memphis Mori sits in her shop on Oct. 6, 2019.Glenn Lowson/The Globe and Mail

Canada’s largest banks approved more than $5-billion in no-interest loans to small businesses in the first five days of an emergency government program, but many small-business owners say they won’t qualify because of restrictions around payroll criteria.

Initial demand for the loans, which are intended to bolster cash flow for businesses suffering from the impact of the new coronavirus, has been strong since the program launched last Thursday. Major banks processed tens of thousands of applications by Monday, approving loans that add up to more than one-fifth of the $25-billion earmarked for the program by the federal government.

The loans of up to $40,000, offered through banks and credit unions but guaranteed by government, are interest-free until the end of 2022. For businesses that repay the balance by then, one-quarter of each loan will be forgiven. The first wave of applicants are expected to receive their funds this week, in keeping with the government’s promised turnaround time of two to five business days.

“The uptake has been really strong, which is good, and not unexpected given that this is really the first piece of stimulus hitting businesses," Andrew Irvine, head of Canadian business banking at Bank of Montreal, said in an interview. While the volume of applications has moderated in recent days, “we’re expecting continued good, strong uptake of the program."

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But entrepreneurs say a requirement that small businesses prove they had a payroll between $50,000 and $1-million in 2019, according to their tax forms, is preventing many business owners from accessing the program, called the Canada Emergency Business Account (CEBA).

Many small and medium-sized businesses already feel left behind because the federal government’s key programs for entrepreneurs are focused on loans that add to a company’s debt, including the CEBA. By contrast, a growing number of countries, including Australia and Britain, have created grant programs to cover fixed costs such as commercial rent.

Even among entrepreneurs who want to apply for these loans, some are not eligible. Like many tattoo studios that rent booths or earn a percentage of a tattooist’s work, Grim City Tattoo Club in Hamilton pays its employees as subcontractors and doesn’t issue T4 tax slips.

Owner Memphis Mori quickly learned from her bank that she wouldn’t be eligible for the CEBA program. “The government is overlooking everyone that isn’t in a standard, 9-to-5, T4-type industry," she said.

The minimum payroll threshold of $50,000 excludes an array of company structures that pay employees in other ways. They include businesses employing subcontractors, such as barber shops and Ms. Mori’s; self-employed workers who pay themselves through dividends; and partnerships not registered as limited companies.

“I feel handcuffed simply because we’re not a limited company,” said Peter Ranells of Artimport, a wholesaler and importer of toys and gifts that he runs with his wife, Jane, in Oakville, Ont. “So many businesses like ourselves are being unfairly jeopardized because we can’t apply, even though we’re in a similar financial mess to everybody else."

Prime Minister Justin Trudeau said Tuesday that the government is “working to enhance” the CEBA program and to add support on commercial rent for the hardest-hit businesses. Finance Ministry spokesperson Maéva Proteau said in an e-mail Tuesday that Ottawa was in talks with the small-business community, but declined to say when those changes would be announced.

Most small businesses are eligible for the loans, and many are seizing the offer. Royal Bank of Canada had approved 42,172 CEBA applications as of 9 a.m. on Tuesday, spokesperson AJ Goodman said, for a total of nearly $1.7-billion in loans.

RBC’s executive vice-president of business financial services, Greg Grice, noted that eligibility criteria are set by government, and said the bank is monitoring unsuccessful applications to make sure that they were submitted correctly. For those who don’t qualify, “we are helping them determine what other options they can explore through our own hardship programs,” he said.

Of 70,000 applications processed through Toronto-Dominion Bank, about 50,000 met the government’s eligibility criteria, spokesperson Paolo Pasquini said.

BMO had approved about 13,000 loans, totalling more than $500-million, as of Monday. But the bank has also heard from businesses that don’t qualify and offered alternative relief, deferring payments on more than 10,000 commercial mortgages and increasing operating credit lines by up to 25 per cent.

“We’ll have to see what policy makers choose to do, and we stand ready to make any amendments to the program as the government might see fit," BMO’s Mr. Irvine said.

Canadian Imperial Bank of Commerce processed 22,172 CEBA applications as of Monday, totalling $887-million in loans, and the online application tool the bank built to automate approvals has worked smoothly, aside from “a few kinks,” said Laura Dottori-Attanasio, CIBC’s head of personal and small-business banking.

“We do recognize that this is a really important time and our clients need us to be there," she said. “It’s just really trying to be as attuned as we can be to the needs of Canadians to see if there’s more that we can reasonably do."

Bankers and government officials are still hammering out details of a $20-billion co-lending program with the Business Development Bank of Canada, which will offer loans of up to $6.25-million to small and medium-sized businesses. And the federal government is still working to launch a wage-subsidy program in the coming weeks.

Accountants across Canada have been fielding calls for weeks from clients looking to apply to the CEBA program, and sometimes even the accountants themselves aren’t eligible. Some have had to dissuade clients from declaring business-dividend income as employment income to meet the program’s eligibility rules – adding ethical and legal complications to heartbreaking decisions business owners already have to make.

“Are these people crooks? No, they aren’t – they’re desperate,” said Afshan Ahmad, a CPA in Whitby, Ont., who has declined to make such changes for clients. “You’ve put them in a position where they have no other means of getting help."

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