The Canada Emergency Business Account (CEBA) has been a financial lifeline for many small businesses across Canada, providing critical support in the wake of economic disruptions caused by the global pandemic. As the upcoming deadline of March 28, 2024, approaches, businesses that benefited from CEBA are now facing the next crucial step: refinancing their CEBA loan. This comprehensive guide aims to demystify the process of CEBA refinancing, ensuring you have all the information needed to make informed decisions and meet the deadline successfully.
Understanding CEBA: A Recap
Before delving into the intricacies of refinancing, let’s briefly recap what the CEBA program entails. Launched as a response to the economic fallout from the COVID-19 pandemic, the CEBA offered interest-free loans of up to \$60,000 to small businesses and not-for-profits. These loans were designed to help cover operational costs during a period when revenues had diminished. A key feature of the CEBA loan is the loan forgiveness portion, where up to $20,000 (one-third of the total loan) could be forgiven if the loan is repaid by January 18, 2024. However, companies that applied for CEBA refinancing with their primary financial institution have the repayment deadline extended to March 28, 2024 to qualify for partial loan forgiveness. Businesses have more time but also need to start planning for refinancing if they cannot repay by this new deadline.
The Importance of CEBA Refinancing
Refinancing your CEBA loan is essentially about restructuring the way you’ll repay the borrowed funds, especially if you’re aiming to take advantage of the loan forgiveness component or if you need more time beyond the March 28, 2024 deadline. As interest has begun to accrue as of January 19, 2024 on the remaining balance, understanding your refinancing options is crucial to managing your business finances effectively and avoiding unnecessary costs.
Continuing with the CEBA Loan
An alternative that some may consider is to continue with the CEBA loan. The terms to continue are:
- For all companies interest began to accrue on January 19, 2024. This means that every month interest is charged and must be paid to your financial institution once per month. The interest rate is 5.0% per year. In today’s environment, this interest rate is considerably lower than what most companies can borrow. For companies with a $60,000 CEBA loan, the monthly interest payment is $250.00. A company would pay interest until the loan is fully repaid.
- The maturity date of the CEBA loan is December 31, 2026. The last possible date for repaying the loan including the original amount borrowed and all interest is December 31, 2026.
- The loan principal, or the amount borrowed must be repaid before the maturity date. For many companies, it is best to pay the principal in multiple payments over a period of time. Some companies may elect to repay the principal as close to December 31, 2026 as possible. This strategy can work well if you are certain that you will have the cash to repay the loan amount.
- The most significant drawback of continuing with the CEBA loan is that companies do not qualify for government forgiveness. If a $60,000 loan is repaid by March 28, the company will need to repay approximately $40,600 ($60,000 less $20,000 forgiveness plus $600 interest). However, if the company continues with the CEBA loan and repays the principal on December 31, 2026, the total cost of the loan is approximately \$68,900. Saving $28,300 is a significant achievement for most companies.
Preparing for Refinancing
- Review Your Financials: Start by assessing your business’s current financial health. How much of the CEBA loan have you used, and what portion can you repay by the deadline? Understanding your financial position will help you decide on the best refinancing strategy.
- Explore Refinancing Options: Banks and financial institutions that participated in the CEBA program are likely to offer refinancing options. These may include converting your CEBA loan into a term loan with specific repayment terms and interest rates. Contact your lender to discuss what options are available to you.
- Consider the Impact on Cash Flow: Refinancing your loan means you’ll have to make regular payments, which will impact your business’s cash flow. Prepare a cash flow forecast to ensure that you can meet these new obligations without straining your finances.
- Seek Professional Advice: It’s wise to consult with a financial advisor or accountant who can provide personalized advice based on your business’s unique situation. They can help you navigate the complexities of refinancing and ensure that you’re making the best decision for your business.
Meeting the March 28, 2024 Deadline
The March 28, 2024, deadline is critical for all CEBA loan holders. To take advantage of up to $20,000 of loan forgiveness, you must repay the full amount of the CEBA loan. For companies that have a $60,000 loan and have applied for refinancing with their primary financial institution, the amount due is $40,000. For companies with a $40,000 CEBA loan, $30,000 must be repaid before March 28, 2024. It is important to have a refinancing plan in place by this date if the company does not have enough money to repay the CEBA loan. If you intend to repay the loan in full to take advantage of the forgiveness feature, begin planning your finances now to accumulate the necessary funds. If you’re considering refinancing, start the application process well in advance of the deadline to ensure all paperwork and approvals are completed on time.
CEBA Loan Repayment Strategies
- Full Repayment: If possible, repaying the full amount before the deadline is the most cost-effective strategy, allowing you to benefit from the loan forgiveness aspect and avoid future interest.
- Partial Repayment: If you can only repay a portion of the loan, pay off as much as you can before the deadline to reduce the principal amount and, subsequently, the interest on the remaining balance.
- Refinancing: For those unable to repay by the deadline, refinancing into a term loan will spread out your payments but also introduce interest charges. In most cases, the additional interest charges are significantly less than the $10,000 to $20,000 government forgiveness. Ensure you understand the terms and how they impact your business finances.
Leveraging Government Resources
The Government of Canada and various financial institutions offer resources and advice for businesses navigating the CEBA repayment and refinancing process. Utilize these resources to stay informed about any updates to the program, including changes to deadlines or refinancing terms.
Conclusion
The CEBA program has been instrumental in helping businesses weather the storm of the pandemic. As we approach the March 28, 2024, deadline for CEBA repayment, preparation and understanding of your options are key. By taking proactive steps now, you can ensure that your business not only meets the deadline but also positions itself for sustainable financial health in the future.
