When the Canadian federal government announced changes to the CEBA program on September 14, 2023, they made it clear that the government stance was encouraging businesses and lenders to take advantage of CEBA loan forgiveness. The changes announced in September give companies more time to seek alternative financing so they can repay the CEBA loan before the loan forgiveness deadline. The question is, What type of businesses qualify for CEBA refinancing and where can you get it?
I am often asked which types of businesses received CEBA loans. There were almost 900,000 CEBA loans and there are about 1.2M registered businesses in Canada. This means nearly all small business owners took out a CEBA loan. Therefore, because such a large proportion of businesses received the loan, it is safe to assume that all types of businesses (across all geographies and industries) took advantage of the CEBA program.
Part of the widespread adoption of the program came from its needs-based (not credit-based) criteria. The criteria for receiving a CEBA loan was having a payroll between $20k and $1.5M in 2019. In addition, the non-deferrable expense stream was added which allowed companies with $40k to $1.5M in expenses in 2019 to apply for a CEBA loan. If your company qualified in either stream, then you most likely received a CEBA loan and qualify for the loan forgiveness.
The loan forgiveness program allows companies with a $60,000 loan to repay $40,000, with the rest of the loan ($20,000) being forgiven. Loans with principal repaid by January 18, 2024 qualify for government forgiveness of the remaining $20,000. For companies with a $40,000 CEBA loan, if $30,000 is repaid by the same date, $10,000 will be forgiven.
The September 14, 2023 announcement introduced some additional features of the CEBA program as well. Companies that apply for a loan via their financial institution will have the CEBA loan forgiveness deadline extended to March 28, 2024. This provides both businesses and banks time to apply and review the loan submissions. The measure indicates that the federal government is clearly encouraging companies that do not have the funds to repay their CEBA loan to work with their financial institution to find a way to take advantage of the forgiveness program.
What type of businesses qualify for CEBA refinancing?
According to the CEBA loan agreement, the main reason to refinance a CEBA loan is to take advantage of the loan forgiveness. Up to $20,000 in loan forgiveness means refinancing saves companies a significant amount of money, even if the interest rate is relatively high.
Bank or Credit Union CEBA Refinancing
Most banks and credit unions are offering to refinance their customer’s CEBA loans. Interest rates typically range from prime plus 2% to 12%. Effectively, this is an annual interest rate of about 9% to 19%. While it might sound high compared to the 5% interest rate on your CEBA loan, a CEBA repayment calculator will show that taking advantage of the loan forgiveness means you still pay less. The terms of the loans typically extend to December 31, 2026 or 33 months. Because your financial institution is aware of your financial situation, they are well-positioned to help and provide advice.
If your current financial institution is unable to provide the credit needed to repay the CEBA loan, alternative financing may be the best option. Alternative financing companies typically offer a factoring rate over a 12 to 24-month period. The rate is 1.2X to 1.5X. This means that if you borrow $1, you’ll repay between $1.20 and $1.50 depending on a number of other factors calculated by the lender.
Companies in Good Standing
The Canadian Government states that “the forgiveness repayment date has been extended to January 18, 2024 for eligible CEBA loan holders in good standing.” But what does ‘good standing’ mean? In the simplest terms, it means that a company is still operating and the owner of the company can make decisions that affect the company. However, the government has not clearly stated what good standing means. Typically a company is in good standing with the Canada Revenue Agency (CRA) if it has filed all required documents and paid any amounts due.
It is unlikely that this is what the government is referring to for the purposes of the CEBA loan. Therefore, if the company continues to have a bank account, has an active business registration with the CRA with a business number, it is likely that the company is in good standing and qualifies for the CEBA loan forgiveness.
Companies that are a Going Concern
The term “Going Concern” is an accounting term meaning that a company has the financial stability to continue operating for the foreseeable future. If they don’t, their auditor has to state that the company is not a going concern, and doesn’t have the cash to continue meeting their financial obligations. In a small business context, though, they aren’t necessarily going to have audited financial statements. In this situation, it would be up to the lender to assess going concern for themselves. Lenders can do this in many ways, for example, by getting a comfort letter from the CRA or by looking at the company’s cash flows.
Clearly, if a company is struggling to meet its existing financial obligations, it is unlikely that it would qualify for CEBA refinancing. Lenders not only want to see that a company can meet its current obligations but with additional debt, can repay the lender. To assess the ability to service the loan, the lender might use a calculation of all debt payments (including payments on your CEBA loan) as a percentage of your total revenue. For example, if you pay around $2,500 a month to your lenders and only bring in $3,000 in sales, your lender might have some concerns about your going concern.
Cash is King
Most lenders will use a cash flow underwriting model to determine if the company qualifies for CEBA refinancing. By looking at historical bank statements, lenders get a good idea of revenue and expenses. They use this information to project forward and determine if the company has the ability to support additional debt. In addition, most lenders will look at a company’s credit history. If there is a track record of receiving and repaying debt, it goes a long way to giving the lender comfort that the company will repay CEBA refinancing.
For a majority of SMB’s the owner’s credit score is also very important. The lender will use a combination of cash flow, business credit and personal credit to determine if the company is eligible for CEBA refinancing.
Insolvent, Dormant, or Bankrupt Companies
Unfortunately, not every business has been able to weather the Covid storm. Some businesses took the CEBA loan with the expectation that it would tide them over to better times, which ultimately didn’t materialize. Some businesses have little to no revenue and are non-operating. There are also businesses that ceased to exist when they filed for bankruptcy or became insolvent. Because lenders are primarily looking at cash flow, these types of companies would typically not qualify for CEBA refinancing.
Depending on the type of legal entity, a bankruptcy may not absolve the obligation to repay the CEBA loan. Sole Proprietorships, even if they are no longer operating, are required to repay the CEBA loan as the responsibility shifts to the business owner. As corporations are separate legal entities, if they become insolvent, the government will be a party to the creditors collecting money from the bankruptcy.
Almost all CEBA loan recipients are eligible for CEBA refinancing. The type of industry or the geographic location does not have any bearing on the ability to refinance the CEBA loan. Companies that have good cash flow and a good credit rating most likely qualify for CEBA refinancing from either their financial institution or alternative lenders – and this financing is worth taking advantage of.
Taking advantage of the loan forgiveness can save a company up to $20,000. By refinancing the CEBA loan by January 18, 2024, companies can spare themselves from paying back a large portion of their loan. It’s a significant benefit, and accessing it is worth the extra money or time.
Frequently Asked Questions
Can a small business loan be refinanced with CEBA?
Yes, small business loans can be refinanced with the Canada Emergency Business Account (CEBA). The CEBA Refinancing Program allows small businesses to refinance their existing CEBA loan to save money and improve their financial position. This program offers flexible financing options and potential savings of up to $20,000. Many financial institutions, including the Big Six banks, are open to refinancing CEBA loans for small businesses. However, businesses must act before the repayment deadline of January 18, 2024, to ensure they meet the requirements and avoid any potential automatic loan conversions.