In response to the economic impact of the COVID-19 pandemic, the Government of Canada introduced the Canadian Emergency Business Account (CEBA) to provide financial support to businesses in need. Through CEBA, eligible businesses can receive interest-free loans of up to $60,000, which are intended to help cover operating costs during a period of reduced revenues. One key feature of the CEBA loan is a forgiveness provision: if 75% of the loan is repaid by December 31, 2022, the remaining 25% (up to $20,000) is forgiven.
So, what happens if you don’t repay your CEBA Loan? Let’s explore!
The Canadian Emergency Business Account (CEBA) has been a crucial lifeline for many Canadian businesses grappling with the economic fallout from the COVID-19 pandemic. A total of 898,271 businesses borrowed $49.2 billion through these interest-free loans to cushion the economic pressures of the pandemic. The repayment conditions are attractive. If you borrowed $40,000 or less, 25% of the loan will be forgiven if you repay the remaining balance by the deadline. For those who borrowed more than $40,000, the forgiveness amounts to 25% of the initial $40,000 plus 50% of any extra amount.
This assistance has unquestionably been essential, enabling businesses to remain operational, retain their staff, and pivot their operations in response to the pandemic. However, the road to recovery from the pandemic has been longer and more complex than many anticipated. As a result, some business owners are facing challenges in meeting this repayment deadline and are now questioning the consequences of not repaying their CEBA loan.
Repayment terms of CEBA loans
Under the terms, repayment of the balance of the loan on or before December 31, 2023, will result in loan forgiveness of 33 percent (up to $20,000). The remaining amount is to be repaid by December 31, 2025. However, it’s essential to note that while the loan is interest-free until 2023, interest of 5% per annum will apply beginning January 1, 2024.
What happens if you don’t meet the early payment deadline?
Failing to meet the early repayment deadline of December 31, 2023, means you lose out on the loan forgiveness benefit. The entire $60,000 becomes due by December 31, 2025. This situation can add a significant financial burden, considering the original intent of the program was to provide relief and support business continuity.
For example, a retail business owner from Toronto shared her experience with repaying her CEBA loan. She said, “We made sure to repay our loan by the 2022 deadline. The forgiveness portion helped us reinvest in our business and pivot to online sales more effectively.” This testimonial underscores the value of meeting the early repayment deadline.
What happens if you don’t meet the final payment deadline?
If you fail to repay the CEBA loan by the final deadline of December 31, 2025 you will be in default of the loan and the Canada Revenue Agency (CRA) will commence collections. It is unclear how aggressive the CRA will be in their collection efforts. Knowing that you have paid the monthly interest, but were unable to pay the principal may allow you to negotiate a favourable repayment plan. However, it may be best to find an alternative lender prior to December 31, 2025 so that you are not subject to defaulting on the loan and the associated credit score issues and collection issues.
Will not paying your CEBA loan affect your credit or lead to bankruptcy?
It’s crucial to understand that failing to repay your CEBA loan could have significant implications for your business. Non-payment will likely impact your credit rating, making it more difficult for you to secure loans in the future. In severe cases, it could lead to bankruptcy.
According to a financial advisor from Montreal, “CEBA loans, like any other loan, carry risk. Non-payment can affect your business’s credit rating, and, in extreme cases, can lead to insolvency or bankruptcy proceedings.” He advises his clients to treat the CEBA loan like any other debt and plan for its repayment meticulously.
In conclusion, while the CEBA loan has provided much-needed support for businesses during the pandemic, it’s crucial to approach its repayment seriously. Failing to meet the repayment deadlines can result in loss of loan forgiveness, additional interest, and potential damage to your credit rating.
However, it’s not all doom and gloom. There are strategies and resources available to help you manage your CEBA loan repayment effectively. Consult with a financial advisor, build a contingency plan, and consider the following strategies:
- Pay-Off by Dec 31, 2023, and get $20,000 forgiven for a $60,000 loan. If your business has healthy cash flow and capital, consider repaying the CEBA loan by December 31, 2023, to benefit from the government’s forgiveness on the principal amount.
- Convert CEBA to a 2-year term at 5% interest. If you cannot pay off the loan early, regular payments according to the repayment schedule provided by your financial institution can help you avoid default. However, this strategy would result in you paying an extra $26,000 on a $60,000 CEBA loan compared to the forgiveness option.
- Refinance CEBA in time to get $20,000 forgiven. You can explore refinancing options to replace your CEBA loan with a new loan offering better terms, such as lower interest rates or longer repayment terms. This way you’ll still benefit from the $20,000 forgiveness.
- Combination of Refinancing and Own Payments. You could make monthly payments while also considering refinancing. As a contingency, consider making payments into savings, investment accounts, or short-term GICs. This strategy allows you to save for CEBA debt repayment while potentially earning interest on your money. If the deadline gets extended, you can continue making money on your money.
In conclusion, the CEBA loan has provided the necessary support for many businesses during the pandemic, and it’s crucial to manage its repayment carefully. Your financial strategy will depend on your specific circumstances and needs, so it’s always advisable to consult with a financial advisor to determine the best course of action.