Thanks to the COVID-19 pandemic and resulting shutdowns across the country, the Canadian government introduced emergency measures to keep small and medium-sized businesses afloat. The Canada Emergency Business Account (CEBA) program provided interest-free loans of up to $60,000 to eligible businesses, a portion of which could be forgiven if the early repayment deadline was met.
This article will delve into the impact of the forgivable portion of the CEBA loan and explore eligibility requirements. The forgivable portion of the CEBA loan is offered to all CEBA recipients in good standing with their financial institution. Taking advantage of the incentive simply requires payment of at least $40,000 of the loan before the deadline.
There are plenty of solutions for CEBA borrowers looking to make timely repayment. Whether or not these solutions involve steady repayment, refinancing, or using assets or other collateral, there are a number of ways to approach paying the loan. The important factor is understanding the repayment terms and the implications of missing the deadline. Understanding these key aspects will help business owners make informed decisions and maximize the benefits of the CEBA loan.
Impact of the Forgivable Portion of the CEBA Loan
The forgivable portion of the CEBA loan allows eligible businesses not to repay a portion of the loan. This forgivable amount can be up to $20,000, which is significant for businesses struggling in an uncertain economy. With interest rates rising and inflation becoming a problem across Canada, this $20,000 forgiveness can go a long way. However, staying on top of the Government of Canada’s communications around the loan is essential.
It’s important for businesses to be aware of the repayment deadline, which is December 31, 2023. To take advantage of the forgivable portion, businesses need to ensure that they repay the non-forgivable amount by this date. If they fail to do so, the remaining balance will be converted into a two-year term loan with a 5% per year interest payable monthly. This means that businesses will have to repay the remaining amount and pay this amount with an additional interest charge.
The best way to maximize the forgivable portion is for businesses to manage their finances and make timely repayments before the deadline. Even if business owners wanted to set money aside every month—accumulating interest on their funds in addition to taking advantage of the interest-free perk—they could do so as long as they pay out the remainder prior to the deadline.
For business owners still struggling in the ‘new normal’ economy, there are also other options to repay. The best bet is saving your funds or finding a way (such as through asset sales, family members, or other alternative lenders) to repay a portion of the loan. However, if this isn’t possible, there are many financial institutions that will refinance the loan, to your benefit. For example, instead of letting the loan roll over with the Government of Canada, you could borrow $40,000 from an additional lender, repay the principal, and take advantage of a reduced portion of the loan.
Keep in mind that although banks did not include specific clauses for how the CEBA loan was to be spent—”non-deferrable expenses’ was the extent of the language used by lenders—borrowers looking to refinance should be careful. These businesses might have an easier time obtaining the up-front funds necessary to refinance if they keep track of their expenses and ensure the loan funds are used for eligible purposes, such as payroll and non-deferrable operational costs. Staying organized and meeting the repayment deadline helps businesses increase their chances of having a portion of their loan forgiven and reduce their overall debt.
Keep in mind that when the CEBA terms were expanded to include an additional $20,000 in funds, they became stricter with the terms of the loan. The amended agreement which went along with the expansion required borrowers to certify that all expenditures of the funds were eligible non-deferrable expenses. If you borrowed funds initially and no longer meet this categorization, you may be offside on the terms of the loan.
In this case, it’s best to speak to a financial advisor.
CEBA Loan Repayment
What about the non-forgivable portion of the loan? For businesses that have received the Canada Emergency Business Account (CEBA) loan, $40,000 (or 66% of the total loan amount) is the ‘magic number’. Once borrowers reach this point (ie. have paid back this much of the loan), the rest of the money can be forgiven. Until then, though, it’s up to the business to understand the repayment terms for the portion of the loan that is not forgivable and make their best effort to repay.
As mentioned, the repayment terms, if the loan is not repaid in full, is a 2-year loan with monthly interest payments and a balloon payment for the principal upon maturity. Simply put, every month you will pay 5%/12 times the balance owing and by December 31, 2025 the entire loan must be repaid. Interest will start accruing on January 1, 2024.
In terms of the repayment period, businesses will have two years to repay any remaining balance on the loan. This means that they will need to make regular monthly payments during this period. It’s important to create a repayment plan and budget accordingly to ensure that the loan is repaid on time. If you miss any payments, you will be outside of the boundaries of your loan.
For businesses who know they cannot make the payment by the deadline, the best time to start considering alternative solutions is now. Whether or not a lender will give you better terms on loan than the term loan put forward by the government, starting early means more options. It’s essential to stay organized and keep track of both the loan amount and repayment schedule. Setting aside funds specifically for loan repayment can help ensure that businesses have the necessary funds available when payment is due. It’s also a good idea to explore different repayment options and consider paying off the loan earlier or refinancing if possible to reduce the overall cost.
Use the Forgivable Portion of the CEBA Loan: Before it’s Too Late
CEBA offered a lifeline to businesses facing hard economic times. During the COVID-19 pandemic, business owners often had nowhere to turn: faced with the challenges of lockdowns and a stalling global economy, they were offered funds to stay afloat. Now, understanding the forgivable portion and repayment terms of this loan is essential for businesses to maximize the benefits.
Staying organized, budgeting wisely, and exploring different repayment options means businesses can manage their CEBA loan repayment and get the best possible deal. This will help them reduce their debt burden and work towards financial stability over time. Although the pandemic was unprecedented, It is important for business owners to make informed decisions about their finances. For many, this means taking advantage of the support provided by the CEBA program to navigate these challenging times.