The Canada Emergency Business Account (CEBA) is a financial aid program launched by the Canadian government. Created to aid businesses grappling with the economic consequences of the COVID-19 pandemic, CEBA offered interest-free loans of up to $60,000. The program aimed to provide financial relief to small and medium-sized businesses across the country, and included provisions for loan forgiveness arising from repayment prior to the December 31, 2022 deadline. The deadline for loan forgiveness was later extended to December 31, 2023, owing to a still sluggish economy and the impact of inflation.
But, will CEBA be extended once again? Let’s discuss it!
As of 2023, nearly 900,000 businesses have taken advantage of the program, borrowing a total of $49.2 billion. The repayment terms offered by the CEBA program state that if a business meets the loan forgiveness deadline, 33% of the borrowed amount (up to $20,000) is forgiven. For businesses that borrowed $40,000 (the original amount of the loan) and did not take advantage of the program’s expansion in December 2020, 25% of the initial $40,000, $10,000, is forgiven.
Given the original deadline for loan forgiveness was pushed, Canadian businesses are waiting to see what happens next: will CEBA be extended again? Or should Canadians start looking elsewhere for their loans?
Major Industries That Took Out CEBA Loans
The CEBA loan program was accessed by businesses from a number of industries. Criteria for the program was set based on the businesses legitimacy (whether it existed prior to the pandemic) and its need for a loan (whether it was impacted by the pandemic and paying non-deferrable expenses like payroll or rent). However, given the pandemic’s nature, specific sectors were hit hardest and, as a result, tapped into the CEBA loan program more frequently.
These included the hospitality industry (hotels, restaurants, and bars), the arts and entertainment sector, and retail businesses, particularly those not classified as essential. With lockdowns came extended closures, and without revenue these businesses couldn’t survive..The pandemic hit many industries hard, with some struggling more than others to recover. Here are a few of the industries most heavily impacted:
- Tourism, Hospitality, and Entertainment: Global travel restrictions and local lockdowns hit this sector hard. Even as the world starts to open up again, inflation is putting pressure on margins and worker shortages are bumping up the average wage. Consumers came back to tourism happily—but the industry is still facing major pressure to survive.
- Retail: The shift to online shopping, combined with reduced consumer spending following the pandemic, has made it difficult for many retailers, especially those with physical stores. Like hospitality, inflation and wages are putting pressure on margins, and the need for enhanced health and safety measures has increased operational costs. These factors continue to put pressure on retailers to meet changing consumer behaviors and expectations.
- Personal Services: Although plenty of people were flocking to hair salons after lockdowns, businesses providing personal services like hair salons, gyms, and spas have been hit hard due to the pandemic. The nature of their services makes remote work impossible, and the nature of their services (sometimes a luxury) are less in-demand during an uncertain economic state.
- Manufacturing: The manufacturing sector experienced disruptions in global supply chains, affecting both the production and distribution of goods. Although manufacturing has begun to recover, it still faces significant challenges due to ongoing supply chain issues and shifts in demand. Manufacturing is another sector hit hard by inflation, wage shortages, and the price of goods.
- Oil and Gas: This industry was already facing challenges before the pandemic, and the reduced demand for oil and gas during the global lockdowns further impacted it.
Why Refinance a CEBA Loan?
The industries above might be most interested in refinancing, or extending, the CEBA loan. Industry associations like Restaurants Canada, Tourism Industry Association of Canada, and CFIB are all pushing aggressively for an extension of the loan.
But will it happen? The government has been silent on the issue of a CEBA extension. With nothing in the works (that we know of), refinancing can be a good strategic move.
Here are a few reasons why a business might consider this approach:
Loan Forgiveness
One of the most attractive features of the CEBA loan is the loan forgiveness provision. If a business repays the loan by the loan forgiveness deadline of December 31, 2023, a portion of the loan—33%; up to $20,000 for the expanded $60,000 loans and $10,000 for the initial $40,000—is forgiven. Given this provision, many businesses are interested in negotiating a refinanced loan. The write-off reduces the financial burden of the debt, which can be a big relief.
However, repaying the loan by the deadline might be challenging for some businesses, particularly those still grappling with the economic fallout from the pandemic. By refinancing the CEBA loan, these businesses can potentially structure their loan terms in a way that allows them to take advantage of the loan forgiveness while gaining additional flexibility in repaying the remaining loan balance.
With the current terms, the loan converts to a two year term loan on December 31, 2023. This comes with a 5% interest rate and a balloon payment for the full amount at the end of the term. With the exact same terms (a two year, interest only term loan with a balloon payment at the end), businesses could afford even a very high interest rate and still benefit in the end.
The problem is, many businesses will not necessarily qualify for these terms. Given that the original loans were underwritten by legitimacy alone—and that loan terms, including adherence to non-deferrable expense requirements, were not widely enforced—lenders might not want to take much risk. Unless a business owner has good credit to personally guarantee the funds, assets in the business, or consistent revenue streams, they might have trouble getting the credit they need.
Creditworthy businesses might have more luck refinancing the CEBA loan with a new loan that has a longer repayment term. This would allow the business to repay the CEBA loan by the deadline, benefit from the loan forgiveness, and then repay the new loan over a longer period. This could significantly reduce the business’s monthly debt service obligations, freeing up cash flow for other business needs.
Businesses can also potentially structure the new loan to match their cash flow. For instance, a business with seasonal revenues might arrange for larger payments during high-revenue months and smaller payments during low-revenue months. This flexibility can make debt repayment much more manageable and less of a strain on the business’s finances.
Focusing on Business Growth
Refinancing the CEBA loan can also enable businesses to focus more on growth. By lowering the monthly debt repayment, businesses can free up capital to reinvest in the business. This might include spending on marketing efforts, adapting to a changing consumer economy, expanding the team, upgrading equipment, or pursuing other growth..
Refinancing can be particularly appealing for businesses with a high return rate on their capital. By refinancing, these businesses can continue to leverage their capital to generate higher returns, promoting business growth and increasing profitability.
Why Many Businesses Will Choose to Refinance the Loan
Given the benefits above, it is likely that many businesses will choose to refinance their CEBA loan if the forgiveness deadline isn’t extended. The prospect of taking advantage of the loan forgiveness, coupled with potentially more attractive payment terms, can make refinancing a compelling option. The ongoing uncertainty surrounding the pandemic and its economic impact may drive more businesses to seek refinancing.
Despite the end of lockdowns and closures, there’s always the threat of new waves not to mention the current economic situation of labour shortages, inflation, and supply chain woes. Refinancing can provide these businesses with additional financial flexibility, helping them navigate the uncertain economic landscape even as they wait to see whether or not the Government extends the loans
The decision to refinance a CEBA loan should be made in consultation with a financial advisor or accountant. Each business’s financial situation is unique, and what makes sense for one business may not make sense for another. A professional can provide tailored advice based on the business’s financial situation, its prospects for growth, and the terms of both the CEBA loan and potential refinancing options.
Will CEBA be Extended Once Again: Conclusion
Will CEBA be extended once again? The answer is unclear, but getting decisions made ahead of time can be positive for the future of your loan. Uderstanding the intricacies of the CEBA loan program and the potential benefits of refinancing, businesses can make informed decisions that support their financial health and ongoing growth. However, it is crucial that businesses seek professional advice well in advance of the deadline, to ensure they’re making the best possible financial decisions on what for many was an essential loan.
