Can you defer your CEBA repayment terms? Although many businesses struggling with debt in the aftermath of the pandemic are looking for other options, when it comes to funds extended by the Government of Canada, negotiation of CEBA loan terms is a no-go.
The Canada Emergency Business Account (CEBA) program has been a lifeline for many businesses following the pandemic. Launched in 2020, the program offered interest-free loans of up to $60,000 to small businesses and not-for-profits. By 2023, approximately 898,271 businesses had leveraged this program, borrowing a total of $49.2 billion to stay afloat.
As we now find ourselves in 2023, businesses are encountering a new set of challenges. They must navigate an economic landscape reshaped by high-interest rates, soaring inflation, and evolving consumer behaviour. Economic uncertainty, combined with depleted resources from the pandemic years, has left many businesses on shaky footing. This makes it difficult for them to repay their CEBA loans, and given the approaching deadline for loan forgiveness, there’s no better time.
Rising interest rates increase the cost of borrowing and servicing debt, which can squeeze cash flows. Even though the CEBA loan is interest-free, businesses might be struggling with slim margins as inflation erodes purchasing power and raises the cost of goods. Changes in consumer behaviour—such as a shift towards online shopping and a focus on sustainability—mean businesses need to adapt to new needs or risk losing their market share. In this climate, repaying a debt like the CEBA loan can be a daunting prospect.
Terms of the CEBA Loan in 2023
The Government of Canada has extended the loan forgiveness deadline for the CEBA loans to December 31, 2023. If you borrowed $40,000, $10,000 of the loan amount will be forgiven. However, if you capitalized on the program’s expansion to $60,000, $20,000 will be forgiven.
Can you Defer your CEBA Repayment Terms?
The current CEBA program terms do not provide a mechanism for extending the payment period or renegotiating the loan terms. If the loan balance is not repaid in full by December 31, 2023, it will be converted into a 2-year term with an annual interest rate of 5%. Starting from January 1, 2024, the loan will require monthly interest payments at the annual interest rate of 5% per year, until the loan is paid in a balloon payment, in full, by December 31, 2025.
However, this does not mean that businesses are without options. In fact, businesses can explore alternatives such as refinancing the loan, which can save money as well as provide more flexibility.
Refinancing the CEBA Loan: Pros and Cons
Refinancing the CEBA loan involves replacing it with a new loan offering better terms—such as lower interest rates or longer repayment terms. It can be a viable strategy for businesses struggling with their current repayment.
One of the main advantages of refinancing is that it can result in savings. If you refinance your CEBA loan and manage to pay off $40,000 of $60,000 (or $30,000 of $40,000) by December 31, 2023, you can still have a portion of the loan forgiven. This means you would only need to borrow $40,000 instead of $60,000 for the new loan. At the same terms (interest only for two years, followed by a balloon repayment at the end of the term), even a very high-interest rate could be favourable.
Unfortunately, getting these terms might be challenging for some. For borrowers who don’t have assets like property or machinery, a personal guarantor for the loan, or reliable revenue, lenders might be wary of refinancing a large unsecured loan. As it currently stands, there is no option to defer the CEBA loan payment or change its terms beyond the given deadline of December 31, 2023. If the loan isn’t repaid in full by this deadline, loan forgiveness is forfeited. Starting from January 1, 2024, an interest rate of 5% per year begins to accrue. At this point, businesses have the obligation to make interest-only repayments until the loan is paid in full by December 31, 2025.
Given the inability to negotiate the terms of CEBA loans, refinancing is still a viable option for many businesses. Refinancing involves replacing the CEBA loan with a new loan offering better terms, such as lower principal (loan forgiveness) or longer repayment. If refinanced appropriately, you might only need to borrow $40,000 instead of $60,000, and if your business has assets, securities, or a history of good payment, the interest rate might end up being close to the original loan.
However, the success of this strategy largely hinges on the ability to secure a new loan with favourable terms, which may not be feasible for businesses struggling financially. Additionally, it introduces another layer of complexity to the business’s financial situation.
Another strategy to consider is combining refinancing with your own payments, the sale of assets, or money from friends or family. This approach allows you to make gradual payments toward your loan while also pursuing refinancing. In this way, you reduce the principal amount you need to refinance, potentially saving on interest costs. However, since there’s uncertainty about the potential extension of the repayment deadline (and no interest charged on the borrowed funds right now), getting pre-approval for refinancing the loan, might be advisable. Another approach would be to start making payments into savings, investment accounts, or short-term GICs. This way, by the end of the year, you will have some money saved (along with interest earned) to pay down the CEBA debt or secure a loan.
In conclusion, while the terms of CEBA loans are non-negotiable, business owners can employ other tactics to get a better deal. Strategic financial planning to navigate repayment obligations is an option worth considering, but weighing the potential benefits against the drawbacks is essential. This includes understanding the implications of different refinancing rates and ensuring your business can meet the new loan terms. Ultimately, the best course of action depends on your business’s own financial situation, industry, revenue, and future prospects.