As we approach the January 18, 2024 forgiveness deadline, Canadian business owners are considering which strategies to employ regarding their CEBA loan. There are many considerations in the decision, and each business has unique circumstances to take into account. The goal for businesses now is to understand their options are. This article will focus on those who are considering either CEBA refinancing or simply not repaying the loan.
CEBA Repayment Alternatives
There are 5 buckets that most businesses fall into:
- The business is no longer operating or is insolvent – it will not be repaying the CEBA loan
- The business is active but struggling – it does not qualify for any financing but is considering continuing with the CEBA program
- The business is active and qualifies for alternative lender financing
- The business is active and qualifies for bank financing
- The business has the cash on hand and will repay the CEBA loan by January 18, 2024
We will focus on the second and third buckets in this article, with a focus on what happens if a company is forced to default on their CEBA loan. This could be the case for more than 250,000 Canadian businesses, especially in hard-hit sectors such as hospitality. In a vast majority of cases companies are far better off seeking alternative financing, but let’s understand why.
Focus on repaying the CEBA Loan
If you have not made plans to repay your CEBA loan or are struggling to finance it, the best course of action is to apply to the financial institution that holds your CEBA loan. Even if you are certain that the business does not qualify for CEBA refinancing with the bank, applying for refinancing resets the partial loan forgiveness deadline to March 28, 2024. While this doesn’t solve the issue, it does give business owners an extra couple of months to find the best financing option. This extra time could be the difference between a more comfortable funding situation and a lot of additional stress.
In order of most costly to least, the CEBA options for companies that are in buckets 2 and 3 are:
- Continue with the CEBA loan
- Alternative lender financing
What about personaly refinancing your CEBA loan? Although business owners might have creditworthiness that their business does not, we don’t discuss personally financing CEBA loan repayment. This is because, while possible, it may not be advisable due to the financial stress it can place on individuals and families.
Defaulting on the CEBA loan
The CEBA loan was created for a situation that businesses and lenders have never seen before. It’s unique in almost every way, from the structure to the delivery of the CEBA loan. All of this means default on the loan will almost certainly be different from anything we’ve seen before.
So what do we know right now? Here is the information provided to date from announcements made by the government.
- Interest will start to accrue for everyone who has not repaid the CEBA loan on January 19, 2024
- The banks will collect interest each month. The bank will attempt collection for 2 months and if not paid, the loan will be in default
- When the loan is in default, the bank will pass the loan to the Canada Revenue Agency (CRA) for collection
- An interest rate of 5% will be charged for companies in default. This is the same rate that companies not in default will pay.
- Collections will commence in the Spring of 2024
At first glance, it’s easy to think defaulting on the loan may be the best option as there are no apparent additional costs. However, don’t be mistaken – there are serious consequences to defaulting on your CEBA loan.
The CEBA loan is with the financial institution, not the federal government. This means that , if a company is in default, it will tarnish its record more than just the CRA. The default will also be registered with its financial institution. In addition, the default will be reported to credit rating agencies that monitor personal and commercial credit. This will make it challenging for the business to attract both equity and debt financing and may have long-lasting negative effects on the business. However, although the default impacts your relationship with your lender, the banks are not responsible for collecting the debt from borrowers. Collecting CEBA debts falls to the largest collection agency in Canada, the CRA.
CRA Debt Collection
As many business owners probably know, it’s a good idea to stay on the right side of the CRA. The Canada Revenue Agency is the largest, and probably the most sophisticated, debt collector in Canada. This gives the CRA significant power to collect debts. Because the CRA has access to a material amount of company-specific financial data, it can be very strategic and effective with the collections process.
Do not underestimate the significant effort it will take to work with the CRA to manage collections. Unlike a traditional lender, the CRA has broad power to collect outstanding debts, including unpaid taxes or other amounts owed. They do this using several methods, from garnishing bank accounts to taking legal action to claim what is owed.. Here is a general overview of the process:
- Notification: Initially, the CRA will notify the debtor of the amount owed through notices or statements. This includes information about the debt and the deadline for payment. The CRA must make 3 verbal attempts to contact you by phone, and 1 attempt in writing, before taking legal action.
- Payment Arrangements: With the CRA’s broad power to collect comes a degree of flexibility when making arrangements to repay. However, there is no ‘deal making’ possible with the CRA. If the debtor is unable to pay the full amount immediately, the CRA might work with them to establish a payment plan. This allows the debtor to pay their debt in installments over a period of time. However, for CRA debt to be discharged, the debtor would traditionally need to make a consumer proposal or file for bankruptcy.
- Interest and Penalties: If the debt remains unpaid, the CRA may apply interest and penalties to the outstanding amount. These charges can accumulate over time, increasing the total amount owed. Even though the government has announced that there are no penalties for the cohort of companies that defaulted on the December 31, 2023 repayment deadline, there is no guarantee that penalties won’t be assessed to other companies in the future.
- Legal Action: If the debt is still not paid, the CRA can take legal action. This might include:
- Garnishing Wages or Bank Accounts: The CRA can legally require an employer or a financial institution to send part of the debtor’s income, or bank balance, directly to the CRA.
- Liens on Property: The CRA might place a lien on the debtor’s property, such as a house. This means the debt must be paid before the property can be sold, and essentially gives the CRA ‘first dibs’ on the proceeds from the sale
- Seizing and Selling Assets: In some cases, the CRA may seize assets like cars, boats, or other valuables and sell them to recover the debt. This is more common in some jurisdictions than others.
- Set-Offs Against Other Government Payments: It is unclear if the CRA may apply any tax refunds or government benefits the debtor is entitled to receive against CEBA debt. The CEBA loan is with the bank which is a separate entity from the CRA. Even in traditional tax debt situations, the CRA only has access to certain benefits when collecting on the amount owed.
- Working with Collection Agencies: In some situations, the CRA might use external collection agencies to assist in collecting the debt.
- Bankruptcy or Insolvency: If a debtor declares bankruptcy or is insolvent, there are specific legal processes that the CRA follows in these situations.
It’s important for individuals or businesses facing debt collection by the CRA to understand their rights and responsibilities. They may also seek advice from tax professionals or legal advisors to navigate this process. The CRA also provides information and assistance to help debtors understand their options and obligations.
Alternatives to Defaulting on CEBA Loans
Defaulting on your CEBA loan has costly implications. Not only will you likely need to seek professional advice (at your cost) when negotiating the situation, the process can continue long past the original loan term.
So what is the alternative? A key assertion is that it costs less to pay back the CEBA loan in time for the loan forgiveness deadline than miss the deadline and not receive $10,000 to $20,000 in loan forgiveness. Even with these economics, the other factor that affects all businesses is cash flow. That is, how much cash comes into the business and how much goes out, resulting in how much is left at the end of the day. Different business types and industries have different cash flow needs in order to run. By assessing cash flow, an entrepreneur can determine if they can support a loan and how much they can pay on a weekly or monthly basis.
One school of thought is to borrow from wherever possible as a method of CEBA refinancing. Only as a last resort should one consider using their personal credit card or any other personal sources of borrowing to fund the business. As mentioned previously, iIt is important to make an informed decision when mixing personal and business finances as this can cause considerable stress. If the business isn’t healthy enough to support a loan on its own merits, you as an individual should probably be wary of entering the fray.
The most logical, simplest and cost-effective solution to CEBA refinancing is obtaining a loan from an Alternative Lender. These lenders specialize in lending to small and medium businesses and are focused on CEBA refinancing. Even at a high interest rate, businesses who qualify and apply for alternative financing can potentially come out ahead.
Alternative lenders have dedicated CEBA refinancing programs. As an example, On Deck launched CEBA refinancing months ago and has a very simple qualification form. Other lenders such as Merchant Growth and Driven also have active CEBA refinancing programs. For a full list of lenders visit https://ceba.ca/financialinstitution/. Generally, alternative lenders are looking for a minimum of $100,000 in annual sales and a consistent cash flow. Even if there have been missed loan payments in the past, there are lenders that will provide CEBA refinancing.
Taking the risk of defaulting on a CEBA loan rather than seeking CEBA refinancing is a risky strategy with consequences far beyond what you might currently understand. Defaulting on any loan is very time-consuming, deteriorates credit scores and has long-term negative consequences. Defaulting on a CRA loan adds another level of complexity. In addition, it is stressful and can have a toll on one’s mental health. However, there are a number of alternatives. These include continuing with the CEBA loan or accessing CEBA refinancing from an alternative lender. By focusing on the loan forgiveness of $10k to $20k, businesses should do everything possible to pay back their CEBA loans rather than default on them.