On September 14, 2023, the Canadian government extended both the deadline to qualify for CEBA loan forgiveness and the CEBA loan repayment deadline. In addition, they provided some breathing room to negotiate with financial institutions for CEBA loan repayment.
So what does this mean for business owners?
The most important deadline, the qualification for loan forgiveness, hasn’t changed much. Initially set at December 31, 2023, the deadline now sits at January 18, 2024.
CEBA Loan Forgiveness
Does a 18 day extension really make a difference? For most Canadian business owners, probably not. While it does alleviate some stress over the Christmas holidays, the extension isn’t long enough to have a considerable effect. However, the key aspect is that now we know the deadline is soon approaching. This means it’s critical to start to plan now. The Department of Finance’s decision gives some clarity to business owners around the CEBA extension. Instead of the bailout they might have been expecting, the new deadline makes it clear that loan forgiveness is the next step for business owners. Taking advantage of the government forgiveness will be meaningful for many SMBs – and the time to act on this is now.
Let’s review the details of the forgiveness. Companies that have a $40,000 CEBA loan qualify for $10,000 of forgiveness. This equates to 25% of the loan. Companies that have a $60,000 CEBA loan qualify for $20,000 of forgiveness and would need to repay $40,000. As most companies have a $60,000 CEBA loan, $20,000 is a meaningful number. Not having to pay a third of a loan is critical for small business margins and cash flows, especially if revenues have been slow to rebound after the pandemic. Now more than ever, it’s important to repay the loan by the new deadline of January 19, 2023 and qualify for the forgiveness.
CEBA Loan Refinancing Extension
The announcement on September 14, 2023 introduced a new element to the CEBA loan. Now, companies negotiating with their financial institutions to repay the loan have until March 28, 2024 to do so, in order to qualify for forgiveness. This is another indicator that the government doesn’t plan to bail out business owners: I believe the main reason the government introduced this element is to encourage the many companies that have not begun to plan their repayment. With the volume of businesses looking to talk to their financial institutions, this new feature gives borrowers more time to negotiate a loan. Therefore, companies that enter into a conversation with their financial institution before January 18, 2024 will have until March 28, 2024 to repay their CEBA loan and qualify for government forgiveness. An unprecedented number of CEBA recipients, coupled with the need to address most SMBs on an individual basis, was overwhelming for the banks. This new system makes a lot of sense because the banks will have almost 3 months to work with their clients to repay the CEBA loan.
It also incentivizes businesses to consider refinancing. Coupled with the final element of the CEBA loan changes made in September of 2023, the Canadian government established the boundaries of what they were willing to do for business owners.
CEBA Loan Maturity Date
This last element is a new CEBA loan maturity date of December 31, 2026, rather than December 31, 2025. This gives businesses an additional year to repay their CEBA loan. It is very important to note that if companies have not talked to their financial institution by January 18, 2024, the loan converts to a monthly interest payment plus the principal on January 19, 2024. The loan principal, typically either $40,000 or $60,000, is then due on or before December 31, 2026. One scenario may be that a company has asked their bank for a loan prior to January 18, 2024 but is subsequently declined. In this case, the company would start to pay interest on April 1, 2024.
If a company does not receive a loan from their financial institution and does not qualify for government forgiveness, they can expect the following costs: Assuming a $60,000 loan starting on April 1, 2024, the business owner would pay 5% of $60,000 divided by 12 months, or $250.00 per month. In 2024 they would pay 9 months of interest for a total of $2,250, in 2025 they would pay 12 months of interest for a total of $3,000 and they would pay the same amount in 2026. This is assuming that the principal of $60,000 is repaid on December 31, 2026. In total, the company would pay $68,250. If the company does not repay by January 18, 2024 and does not work with their financial institution, they will start to repay the loan on January 19, 2024. This would result in a total cost of the CEBA loan of $68,903.
Actions to Take
When the CEBA program was launched, interest rates were historically low and a 5% interest rate seemed very high. Fast forward to now, a 5% interest rate is fantastic. If a company is willing to give up on the forgiveness, the interest rate is quite reasonable. The decision at that point would be the difference between the forgiveness amount and the cost of borrowing at a much higher rate.
Even with the low interest rate, every business should try to pay back their CEBA loan early enough to qualify for the government forgiveness program. Assuming a company is not able to get a loan from its financial institution but is doing everything it can to grow its business, the best alternative is to seek alternative financing. While every situation is different, companies that qualify for a loan from an alternative lender will pay around $50k over a 12 month period. This is far less expensive than staying with the CEBA loan and paying $68k. However, every situation is different and you’re strongly advised to speak with your financial advisor.
The announcement from the government today was helpful in providing clarity to some business owners and financial institutions. It may not be what everyone wants but at least there is now clarity behind future decision making, and Canadian businesses can now plan for their financial future.