The Canadian Emergency Business Account (CEBA) was introduced by the federal government to financially support small businesses during the COVID-19 pandemic. This interest-free loan program was designed to help cover operating costs for businesses, especially small-sized businesses, that have been severely impacted by the pandemic. However, as the deadline for CEBA loan applications approaches, many small businesses face challenges in repaying their loans.
Now, what exactly is the problem with repaying the CEBA loans and what are the companies that will struggle to refinance their CEBA loans? Let’s take a closer look.
Recently Revised CEBA Loan Deadlines
The Canadian Emergency Business Account (CEBA) program has injected up to $49.2 billion. This financial aid has been crucial in helping businesses survive during the pandemic. The terms of the CEBA loans were designed to ease the burden on businesses. According to the most recent updates made on September 14, 2023, up to one-third of the loans can be forgiven if businesses are able to settle the outstanding amount by January 18, 2024.
However, missing this deadline would have significant financial repercussions. Businesses that fail to repay within the stipulated timeline would not only lose out on the forgivable portion of the loan but also convert their remaining debt into a three-year loan with an annual interest of five percent.
In an effort to provide flexibility, businesses were also given the option to refinance their CEBA loans with a financial institution of their choice. Those businesses that took this opportunity were given an extended deadline of March 28, 2024, to arrange the necessary financial resources and still qualify for the forgivable portion of the CEBA loan.
Other than this, the government has made another concession to ease the financial burden on businesses. The deadline to pay back the loans without forgiveness has been extended an additional year to the end of 2026. This extension provides businesses with a larger window to recover from the economic fallout of the pandemic and organize their resources to repay the loans. This measure is particularly beneficial to those businesses that have been hit hardest by the pandemic, offering them more time to stabilize their operations and finances.
Read more: Revised CEBA Loan Deadlines.
Companies that will Struggle to Refinance their CEBA Loans
Despite these measures, many businesses are still struggling to refinance their CEBA loans. The Canadian Federation of Independent Business (CFIB), an organization that represents approximately 100,000 businesses nationwide, has been actively voicing concerns about CEBA loans. The group’s president, Dan Kelly, has expressed serious worries about the potential repercussions of failing to extend the CEBA deadline further. According to Kelly, maintaining the current CEBA deadline might put the existence of numerous small businesses at risk. He warns that without the extension, an estimated 250,000 small businesses stand to fail if they are unable to benefit from the forgivable portion of the loan.
So, what are the companies that are most likely to struggle with refinancing their CEBA loans? It comes down to their financial stability and whether they have the means to continue operations while meeting their financial obligations, a concept known as “Going Concern” in accounting parlance. Typically, a company’s auditor would make this assessment, but in the context of small businesses, audited financial statements may not always be available.
In these cases, the onus falls on the lenders to evaluate the company’s financial viability. They might seek reassurances from the Canada Revenue Agency (CRA) or scrutinize the company’s cash flows. If a company is already grappling with its existing financial obligations, the chances of it qualifying for CEBA refinancing are pretty low.
Lenders are interested in more than just a company’s present financial obligations. They need to have confidence that the company can service additional debt and still be able to repay the lender. One common method of assessing this is evaluating all debt payments, including those of the CEBA loan, as a percentage of total revenue.
For example, if a company pays approximately $2,500 per month to its lenders but only generates $3,000 in sales, it raises serious doubts about its going concern. Such a financial situation could make a lender hesitant to approve CEBA refinancing. Therefore, companies in this position will likely struggle with refinancing their CEBA loans.
How to Not Struggle to Refinance CEBA Loans
If you want your business to overcome the hurdles, prioritizing cash flow and maintaining a good credit rating can be highly beneficial. Companies with strong cash flows are more likely to qualify for CEBA refinancing, whether through their existing financial institution or alternative lenders. This is particularly beneficial because of the loan forgiveness aspect embedded in the CEBA terms. By acquiring refinancing by January 18, 2024, businesses can save up to $20,000 through loan forgiveness. This means that a significant portion of the loan you originally took out does not need to be paid back, thereby lessening your financial burden.
To leverage this benefit, your business should focus on generating sufficient revenues and efficient cash flow management. Regular monitoring of cash inflows and outflows, as well as identifying areas for cost reduction, can significantly improve your cash flow.
A good credit rating is another crucial factor that lenders assess when considering CEBA refinancing requests. Businesses with a strong credit history demonstrate financial discipline and reliability, making them attractive prospects for lenders. Therefore, ensuring timely repayment of any existing loans and avoiding unnecessary debt can contribute to a higher credit score.
In summary, businesses that are proactive in managing their cash flow, maintaining a good credit rating, and understanding the specifics of CEBA loan refinancing can secure the most advantageous terms. The $20,000 loan forgiveness is a significant financial relief that can potentially be the lifeline many businesses need in these challenging times, making it worth the extra effort and resources.
So, companies that have taken on CEBA loans but are struggling to refinance should not lose hope. The government has extended the deadline, and options are available to improve refinancing eligibility. Just focus on strengthening your cash flow, maintaining a good credit rating, and staying informed about the specific requirements of CEBA refinancing.