The Canada Emergency Business Account (CEBA) program provided interest-free loans of up to $60,000 to small and medium-sized businesses at the onset of the COVID-19 pandemic. CEBA loans were introduced by the federal government in April of 2020 and were intended, to mitigate the economic impact of the outbreak. More than 900,000 Canadian businesses took advantage of CEBA loans, although many of them are still unsure if they’ll be able to repay.
Despite economic pressure continuing as we enter, and exit, 2023, the Canadian government has remained silent on the timeline for repayment. A major part of the CEBA loan program was loan forgiveness incentives, which expire at the end of this year. CEBA loans offered forgiveness of up to a third of the loan value ($20,000) if the loans were repaid by a specified deadline.
While the CEBA repayment deadline had originally been set for December 31, 2022, the federal government extended it to December 31, 2023 in response to an ongoing surge in COVID-19 cases, high inflation, and the continued pressures of a sluggish economy.
Challenges for CEBA loan repayment in 2023
COVID-19 cases in Canada remain low as of mid-2023. However, this doesn’t mean the economic impact of the pandemic has passed. For industries hit hardest by unprecedented economic shutdowns, it’s still a rocky road ahead. According to researchers at McKinsey, the travel and tourism sector took the brunt of the pandemic. In 2021, they predicted an extended (and uncertain) recovery in the sector lasting until at least 2023. A 2023 recovery did occur: EY’s hospitality industry outlook for the year was strong. However, inflation and the cost of borrowing money is high, which has prevented the capital-intense hospitality industry from making any big moves.
Similar challenges exist in other industries, where business has rebounded after the pandemic but other challenges remain. The food service sector, for example, is being stretched thin by labor shortages. Job vacancies in food service reached 171,715 last June, which is three times as many as there were pre-pandemic. 77% of food service businesses are raising wages, and 64% are reducing their hours.
Although economic interest in these areas has returned, these new pressures mean CEBA loan repayment might seem like a long way off.
Associations Advocating for Deadline Extension
Business groups and associations across Canada have been vocal about their request for an extension of the repayment deadline. Restaurants Canada, a not-for-profit trade association operating in food service, has proposed a 36-month payback extension and a scale-down model on the forgivable portion of the loan.
Although demand for restaurants in Canada has returned, representatives say that with “half of all foodservice companies currently operating at a loss or just breaking even and 80 percent making less profit today compared to pre-pandemic (2019),” CEBA repayment deadlines can mean the difference between continuing to operate or closing their doors.
They argue that the phased loan extension would save thousands of restaurants and other small businesses from declaring bankruptcy. Missing an early CEBA repayment deadline doesn’t necessarily mean default: the forgiveness incentive is removed, but the balance converts to a term loan bearing interest at 5%. However, the association suggests approximately 20% of restaurants that have not already repaid the CEBA loan will not be able to repay it in part or at all, as 43% of the food service sector is operating at a loss or just breaking even.
The Canadian Federation of Independent Business (CFIB) has also been advocating for an extension of the repayment deadline. In addition to pushing for repayment in December 2024, CFIB has urged the government to increase the forgivable portion of all CEBA loans to at least 50%. They have also endeavoured to ensure all recipients deemed ineligible after receiving the CEBA loan, who received the loan in good faith, get to keep the forgivable portion if they repay the loan by the end of 2023.
Changes to the CEBA Program
The CEBA program has been modified throughout the pandemic in order to better cater to business’ needs. The first of these modifications was a bump up of the CEBA loan amount from $40,000 to $60,000. The federal government has extended the forgiveness repayment deadline from December 31, 2022, to December 31, 2023, for eligible CEBA loan holders in good standing. It now stands that businesses who are unable to pay back the CEBA loan by the end of 2023, will have the remaining balance converted into a two-year term loan at 5% interest. In this case, full repayment of the loan amount is required, with no forgivable portion.
Pros and Cons of Extending the Deadline
Extending the CEBA repayment deadline has both advantages and disadvantages. On one hand, it provides additional breathing space for businesses struggling to recover from the economic impacts of the pandemic.
These impacts arise even as the world re-opens and customers return. Even in rebounding industries, delaying CEBA repayment can potentially prevent surges of bankruptcies and job loss. Moreover, it also accommodates the reality of an uneven recovery. Challenges vary across sectors, with some industries, such as food services or hospitality, facing a wider range of problems requiring more time to repay.
However, there are also potential downsides to extending the repayment deadline. It could potentially encourage fiscal irresponsibility or increase the risk of businesses taking on more debt than they can manage—especially considering most of them didn’t intend to take on additional debt in the first place. As the loans are backed by the government, a higher default rate could have significant impacts on public finances. CEBA loans were facilitated based on need rather than traditional underwriting, so many businesses might be in no financial position to repay.
Debt can be crucial for growth and survival during tough economic times. However, extending the repayment date without adjusting loan forgiveness or considering changes to the nature of the loan only shifts an unattainable loan repayment date into the future. While the CEBA loans are interest-free if paid by the deadline, interest will apply beyond that point—as well as losing out on the forgiven portion of the loan.
This prolongs and increases outstanding business and government debt, hurts the credit of small business owners, and gives rise to questions about the long-term feasibility of improvement.
While extending the CEBA loan repayment date might seem like a sigh of relief, it’s important to consider the potential downsides. As always, the specifics will depend on the individual circumstances of each business and the terms and conditions of the loan. It’s crucial for businesses to understand these factors and plan their financial strategies accordingly.
The associations advocating for further extension of the CEBA repayment deadline present valid points reflecting the ongoing financial strain experienced by many small businesses. However, it’s important to balance these considerations with the potential economic risks and implications for the public purse.