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Canada Emergency Business Account (CEBA) loans were a $49.2-billion lifeline for 898,271 businesses trying to survive pandemic closures, but the Canadian Federation of Independent Business (CFIB) says many will struggle to meet the deadline to repay and take advantage of some loan forgiveness. That deadline was recently extended, but only by a few weeks to Jan. 18, 2024 from Dec. 31, 2023.
“Only 50 per cent of small business owners are back to normal levels of sales [compared with] pre-pandemic levels,” says Dan Kelly, the CFIB’s president, chief executive officer and chair.
“On top of that, the average small business has taken on more than $100,000 in debt just to survive the period of COVID restrictions … [that was] not for good things like [opening] a new location or [buying] a new piece of equipment, but just to keep the lights on.”
The CEBA offered up to $60,000 in interest-free loans to small businesses and not-for-profits with the opportunity for 33 per cent (up to $20,000) in loan forgiveness when those loans are repaid on time. “On time” now means by Jan. 18, or by March 28, 2024, if the business owner submits an application for loan refinancing to the financial institution that provided the CEBA loan by Jan. 18, but needs extra time to finalize the payout of the new loan.
In any case, interest starts accruing on Jan. 19 at an annual rate of 5 per cent with any outstanding balance due on Dec. 31, 2026.
According to Mr. Kelly, 70 per cent of CFIB members have not yet been able to repay anything toward their CEBA loans. While the CFIB continues to advocate for a further extension of the loan forgiveness deadline, Mr. Kelly recommends business owners take steps now to speak with their bank and arrange approval for a term loan at the best possible interest rate.
Even with a higher interest rate than the government’s 5 per cent, it may be significantly better to have $40,000 than $60,000 in debt come Jan. 19.
Have a strategy to repay the new loan
Lei Ren, managing partner at Harmony Financial Solutions Inc. in Winnipeg, has run the numbers and found the breakeven interest rate is about 7.5 per cent, but borrowing $60,000 versus borrowing $40,000 has a significantly different impact on a business’s cash flow. While $60,000 at 5 per cent amortized to the end of 2026 translates to a loan payment of about $1,800 a month, $40,000 at 7.5 per cent works out to about $1,250 a month.
For businesses planning to borrow to take advantage of loan forgiveness, a secured loan can offer the lowest interest rate, Mr. Ren says. Also, it’s key to make sure there’s a strategy in place to repay the new loan.
“Even though [business owners] are struggling, at the very least they should have a plan to pay it back [and] not to get caught again at the end of the third year,” he says.
Mr. Ren adds that the upcoming CEBA deadline is a good reminder for advisors to look beyond a business owner’s growth plans and cash-flow planning to examine the liability side of the balance sheet, and also read the fine print of government programs such as CEBA that affect businesses.
As a case in point, when his clients took out CEBA loans at the height of the pandemic, Mr. Ren made sure they had a clear plan to pay the money back. As a result, they’re not scrambling to repay huge amounts by the loan forgiveness deadline.
That’s been Jackie Porter‘s experience as well. The certified financial planner with Carte Wealth Management Inc. in Mississauga encouraged business owners to start putting money aside to pay off CEBA loans as soon as they were able to start bringing in income. She positioned the loans as a tax break that would last for a couple of years and worked out a strategy with them to ensure there was money available to pay the tax bill when it came due.
Industries haven’t bounced back the same
However, Ms. Porter acknowledges that her clients, who include legal and dental professionals and other business owners who got back to full capacity quickly after the closures, aren’t facing the same challenges as harder-hit industries such as retail and restaurants.
More cushioned from rising costs and labour shortages, her clients have had more room to save toward CEBA loan repayment. In fact, some have been able to reduce their costs – for example, by leasing less office space.
Ms. Porter suggests business owners who are concerned they may not be able to make the Jan. 18 deadline quickly arrange to meet with their accountant and financial planner to find the most expedient way to manage the situation. She says they may also want to contact the Canada Revenue Agency well in advance of the deadline to explain their scenario and try to come up with a plan that works.
Advisors also have an opportunity to be proactive on CEBA loans.
“Clients need to hear from us more than they ever have,” Ms. Porter emphasizes. “People are hurting. There are all kinds of financial pain out there because of inflation and interest rates – never mind dealing with their CEBA loan on top of that.”
This is really the time to be getting in front of clients and being of service to them by helping them look at their expenses, she says.
“[Advisors] can help navigate something that may be an uncomfortable conversation for them to have even with themselves, [and] be that person who they can turn to to help them with solutions,” she adds.
“These are times when advisors can truly prove their value.”
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