Owing to the events of the COVID-19 pandemic—the most widespread and severe pandemic the world has seen since the Spanish flu—the global economy took a post-pandemic dive. Although other outbreaks of communicable disease have occurred between 1918 and now, COVID-19 was ‘novel’ in many ways. It was the first time most people alive at this time experienced widespread infectious disease. It was also the first global event to introduce mandatory closures and lockdowns on a global scale.
For businesses in Canada, this meant choppy waters. Low-margin industries such as food service, travel-related industries like hospitality or airlines, and many others saw their revenue flows grind to a sudden halt. To mitigate the socioeconomic cost, the Canadian government—as well as many governments worldwide—stepped in.
What are CEBA Loan Agreements?
The Canadian Emergency Business Account (CEBA) is the Canadian government’s answer to the pandemic. CEBA is a loan agreement the Canadian Government launched in early 2020, a quick response to the threat of COVID-19. The purpose of this loan program was to support small businesses and other enterprises struggling with closures, lost business, or reduced operations. Among other aspects of the crisis, social distancing measures, lockdowns, job losses, or public reluctance to engage with brick-and-mortar business crowds meant the CEBA program was a ‘lender of last hope’. Administered by various lending institutions across Canada, CEBA provided eligible applicants with loans ranging between $40k to $60k stretched over two phases of applications.
Thanks to this low-interest infusion of cash, CEBA helped many businesses stay open despite considerable losses from shutdowns and restricted customer access. A portion of the loan is forgivable for those borrowers who abide by specific criteria – namely repaying the non-forgivable portion of the balance in full
Requirements of a CEBA Loan Agreement
The Canada Emergency Business Account (CEBA) loan program offers small to medium-sized businesses impacted by the pandemic some financial support. To ensure successful application and compliance, borrowers were routed through Canadian institutions to administer the loans. This is helpful in terms of both delivery and financial access: borrowers must be vetted to ensure they comply with the requirements of the CEBA loan agreement before taking on a loan, which financial institutions were able to do.
These loan terms are set out by the Government of Canada and include two main features. First, borrower eligibility depends on factors such as business size— which was measured by payroll amounts or other non-deferrable expenses—and demonstrated revenue loss resulting from the public health crisis.
Secondly, the Government’s loan terms guide borrowing and repayment—and cannot be modified. For most businesses that apply to the program, they can receive up to $60,000 with an interest rate of 0%. This interest-free status continues up to the repayment deadline, which was extended until December 31, 2023 last year. The interest-free rate eases the burden on small companies during the economic downturn, and, there is built-in flexibility regarding repayment. While loans come due within two years (and convert to a 5% interest-bearing term loan)—up to $20,000 may qualify for forgiveness if repaid before the deadline.
Unlike the loan terms set out by the Government of Canada, the CEBA loan usage rules which dictate allowable expenses are set out by the banks. Non-deferrable expenses generally include operational costs like rent or mortgage payments, employee wages, and benefits administration fees among others. However, they are not set out specifically in the terms of the loan. Most banks use a general phrase such as “non-deferrable operating expenses” in the terms of their loan—so although loan use doesn’t have to be broken out perfectly, it’s crucial that borrowers stay on the right side of the agreement that they signed. If they have any questions, this is where the relationship with the banks is key.
Meeting agreed-upon loan requirements (even loosely defined ones) means ensuring adherence to guidelines concerning the accuracy of information provided during the CEBA application and complying with agreed-upon loan terms. CEBA loan money can’t be blown on unrelated items, but it doesn’t have to be meticulously itemized, either. However, keeping tabs on where and what you’ve spent the funds safeguard both parties’ interests by promoting transparency in loan usage—maximizing benefits for all involved.
Getting a CEBA Loan
The process for obtaining a CEBA loan consists of three main steps: application, approval, and disbursement.
- During the application process, eligible business owners had to prove they met specific criteria, including demonstrating a minimum payroll threshold and providing proof of economic impact from the pandemic. This was assessed through the provided documents, which could include financial statements, tax returns, payroll records, and other organizational literature.
- Upon submission of the loan application, it went under review by designated financial institutions or partnering lenders. These lenders did not assess creditworthiness by traditional means, but based on specific guidelines provided by the government. Provided that applicant fulfilled all CEBA eligibility requirements and submitted complete documentation, they received a loan approval notification detailing the terms and conditions associated with the proposed CEBA financing.
- After securing loan approval, applicants were allowed to proceed in accessing funds allocated under this program. The timeframe for disbursement was quick, with CEBA funds being disbursed in as little as 5 days. depending on banks’ efficient processing times and contingencies involved in each case. Disbursement options typically include direct deposit into an existing business account with the bank; however, some institutions may also offer alternative methods for disbursement.
Obtaining financial support through CEBA requires adherence to the guidelines the Government of Canada provides. This means business owners must keep up with defined timeframes and stay abreast of possible modifications. Consequently, business owners should maintain open communication channels with their respective lenders and follow up with them on any questions they might have about the loan.
The Importance of a CEBA Loan Agreement for Business Owners
Adherence to the terms and conditions set forth in the Canada Emergency Business Account (CEBA) loan agreement is essential. Business owners seeking financial relief during the pandemic often had no other choice but to take the funds. However, with terms set out by the Government of Canada—and non-negotiable—business owners need to stay on top of what they owe on their CEBA loan, and when. Compliance with the CEBA loan agreement safeguards businesses from potential legal repercussions such as penalties or forfeiture of funds. By following rules surrounding fund allocation, repayment terms, and reporting requirements, businesses maintain their eligible status, save on both interest and principal and stay financially afloat.
Honouring the agreements of a CEBA loan directly contributes to a business’s overall success—businesses that take advantage of the loan forgiveness and interest-free status are much more likely to continue operating long into the future. The purpose of these funds is to offer support through a difficult time, and utilizing them appropriately will not only help business owners get back on their feet but also grow the company into a ‘new normal’. By adhering to the outlined provisions – including spending on payroll, rent payments, insurance bills, and other non-deferrable expenses – and meeting repayment deadlines, companies acquire a strong foundation to build on their pre-pandemic success.