Canada Emergency Business Account (CEBA) loans are the $40,000-$60,000 loans provided by the government to eligible Canadian businesses at the onset of the pandemic. The CEBA program was a central pillar of the Canadian government’s strategy for pandemic response: over $48B was given out in loans, which were taken out by 885,527 businesses. CEBA offered emergency funding to small businesses facing reduced revenues during the pandemic. Businesses used these funds to cover cash flow shortages and continue paying employees, insurance, rent, and other overhead costs. As the post-pandemic economy was slow to recover, the loans were extended in early 2021 from $40,000 up to an additional $20,000 for eligible borrowers.
One of the unique factors of the CEBA program is loan forgiveness. Eligible borrowers can receive up to $20,000 in loan forgiveness if they repay the loan before the deadline. Although the CEBA deadline was extended in 2022, it now sits at December 31, 2023—which is just months away. Although the forgiveness terms only extend to borrowers in good standing, there are still a number of eligible businesses that could take advantage of these terms.
Using the CEBA Forgivable Portion
To access CEBA loan forgiveness, the non-forgivable portion of the loan must be repaid before the December 31, 2023 deadline. Under the CEBA program, eligible businesses can receive loan amounts up to $60,000 with no interest until December 31st, 2023. Of this amount, up to $20,000 is forgivable if business owners repay the rest of the loan.
This means business owners must repay up to $40,000 by the deadline. Once the balance of your CEBA loan is equal to the loan forgiveness amount, the bank will forgive that portion of the loan.
To make sure that they are eligible for CEBA forgiveness, businesses must have taken out a valid CEBA loan during the eligibility period. To do this, they would have had to provide a detailed outline of their non-deferrable expenses that occurred at the time. CEBA loans were provisioned through the Canadian banking system, and all decisions relating to them were (and are) final. Businesses can’t appeal their CEBA loan amount, extend the deadline, or change the terms of the loan with any party other than the Government of Canada.
This makes it difficult for some businesses, that are still struggling (or were struggling prior) to repay their loan in time to access forgiveness. Fortunately, in addition to early repayment through cash flow, there are alternative options for CEBA repayment.
When to Repay CEBA Forgivable Portion
The best possible time to repay the CEBA loan is before December 31, 2023. Although the deadline was extended in the past, the Canadian government has been quiet on the subject so far. Businesses at risk of forfeiting the forgivable portion of the loan should seek financial advice or alternative financing as soon as possible.
However, this is not always possible. Many businesses are struggling in the aftermath of the pandemic. The Canadian Federation of Independent Business (CFIB) suggests that almost 250,000 businesses are at risk of closing unless the Canadian government extends the deadline. This is nearly a third of all of the businesses that took out the loan.
The loan forgiveness portion of CEBA loans is what made the program so attractive to business owners in the first place. Although a number of businesses had their backs against the wall, others likely took strategic advantage of the program. CEBA’s forgivable portion was a major draw. The financing was geared towards low-margin businesses (such as the food service industry), which would have suffered dramatically from the impact of lockdowns and been unable to pay staff or afford operating space. Many food service businesses have returned to normal operations post-pandemic, but slim margins and rising costs means they haven’t necessarily returned to normal profitability.
For businesses that would otherwise not have been creditworthy, CEBA gave them the option of a low-interest loan. Lending terms extended through the programs were not in line with traditional underwriting, which means businesses that would otherwise not have qualified for funds received them.
After December 31, 2023, any outstanding balance on the CEBA loan will automatically be converted into a two-year term loan with a fixed interest rate of 5% per annum. This extended repayment period provides additional flexibility for businesses still recovering from the impact of the pandemic. It’s also a favourable option for businesses that wouldn’t have had the credit to get the funds. However, this option forfeits the loan forgiveness component. Late payment fees may apply in accordance with the lending institution’s policies, but since there are no early repayment penalties associated with CEBA loans, eligible entities are encouraged to repay their balances sooner rather than later in order to take advantage of maximum loan forgiveness.
Borrowers should consult with their financial institutions concerning specifics around late payment fees and review all applicable documentation prior to making decisions about their loan. Understanding these conditions ensures business owners can make informed decisions regarding their management strategies and financial well-being. Since some businesses who received the loan might not otherwise have taken out debt for the business (for example, a small family restaurant run out of a property that they own), it’s a good idea for them to consult with friends, family, and licensed professionals for advice on the best route to choose.
How to Access CEBA Loan Forgiveness
Loan forgiveness allows borrowers to cancel an outstanding loan balance, either in part or in whole. In the case of the Canada Emergency Business Account (CEBA), eligible small businesses impacted by COVID-19 were provided interest-free loans to cover operating costs during a period when these costs might have forced them to close their doors. Under certain conditions and requirements, qualified applicants may cancel a portion of their loan.
Since loans were administered through banking institutions, this is where businesses can access both forgiveness and repayment of their loan. Applicants for loan forgiveness should remain aware of program deadlines and adhere to timelines set forth by their financial institutions. Although these institutions are in charge of administering CEBA loans, timelines and terms are set by the Canadian government. Generally, borrowers who repay their loans before the deadline may be eligible for up to $20,000 in loan forgiveness. However, this timeline may vary depending on individual circumstances as well as changes to government policies and programs.
Approval for loan forgiveness hinges upon demonstrating adherence to established guidelines and is ultimately determined by the Government of Canada. Financial institutions will review loan balances closely prior to forgiving portions of debt, but the terms of the loan are always set out by the government itself.
It’s important for business owners to understand the potential consequences should their application not be granted full or partial loan forgiveness. In such instances, it becomes necessary for businesses to repay outstanding balances within specified timeframes or risk defaulting on the loan.
Defaulting on the loan can be devastating to the business. It will have consequences that might include damage to personal credit scores, difficulty accessing future financing, legal repercussions such as collections or bankruptcy filings, loss of assets seized through liquidation, or even the cessation of business operations altogether. For these reasons, it is crucial that borrowers are prudent when planning how to repay their loan. Carefully review terms and conditions and when in doubt, seek expert guidance.
Plan to use CEBA Loan Forgiveness
The Canada Emergency Business Account (CEBA) program offers financial support to small businesses, not only through the provision of interest-free loans, but through the loan forgiveness incentives associated with them. Key factors business owners should be aware of when applying for a CEBA loan include meeting repayment requirements for the forgivable portion and adhering to deadlines.
Understanding and complying with these terms is crucial: CEBA loans are unique, and terms are non-negotiable. If you believe you’ll struggle to meet the repayment deadline, it’s prudent to seek financial advice as soon as possible. This is not only for ensuring eligibility for forgiveness but also to mitigate any potential legal or financial issues that may arise. By staying informed about the details of the CEBA loan program, small businesses can take full advantage: ultimately showing resilience during challenging economic times, while setting up a foundation for future success.