In the wake of the COVID-19 pandemic, the Canadian government introduced the Canada Emergency Business Account (CEBA) program to assist businesses facing unprecedented financial pressures. The program provided interest-free loans of up to $60,000 to help businesses weather the economic hardships. It was a lifeline for many enterprises during an incredibly challenging period, with a staggering 898,271 businesses borrowing a total of $49.2 billion through the program.
The CEBA loan program had a significant impact on the economy. It allowed businesses to maintain their operations, keep employees on payroll, and pay for essential overheads, thereby preventing more widespread economic fallout. The program was not without its requirements, however. Businesses were expected to repay the loan by December 31, 2023, to qualify for loan forgiveness of a portion of the amount borrowed. If a business borrowed $40,000 or less, 25% would be forgiven, and for amounts more than $40,000, 25% of the initial $40,000 plus 50% of any extra amount would be forgiven.
History of Bailouts in Canada
In the precarious world of economies, there comes a time when businesses, no matter how large or small, find themselves on the edge of a precipice, teetering between survival and collapse. At these times, governments often step in with financial assistance, colloquially known as ‘bailouts.’ In Canada, we’ve seen a number of these pivotal moments, each unique in context and outcome.
In the throes of the 2008-2009 global financial crisis, the Canadian automotive industry found itself on shaky ground. The government, recognizing the importance of this industry to the national economy, stepped up to the plate. Jointly, the federal and Ontario provincial governments furnished approximately CAD 13.7 billion to General Motors and Chrysler. The aim? Prevent an industry collapse that could reverberate through the economy. Fortunately, this story has a (mostly) happy ending. Most of the funding was repaid, although the federal government did end up writing off about CAD 1.1 billion.
The COVID-19 pandemic brought its own set of unique challenges, particularly for the travel industry. Air Canada, the country’s largest airline, felt the brunt of this impact. With planes grounded and revenues plummeting, the government stepped in with a lifeline. This time, a nearly CAD 5.9 billion aid package was assembled, encompassing loans and equity financing. In return, Air Canada agreed to refund passengers for pandemic-cancelled flights, maintain employment levels, and cap executive compensation. As of my last update in September 2021, the final act of this bailout drama is yet to be played out, with the repayment status still in the air.
The oil and gas sector, a cornerstone of the Canadian economy, has also seen its share of government support, often in the form of loans or loan guarantees. In 2020, amidst the economic downturn of the pandemic, the government earmarked CAD 1.7 billion to clean up orphaned and abandoned wells in Alberta, Saskatchewan, and British Columbia, a move aimed at supporting jobs in the sector.
Public Advocacy for CEBA Loan Forgiveness
While the CEBA loan program has been beneficial, the repayment deadline is fast approaching and many businesses are still grappling with the economic fallout from the pandemic. This has led to a growing clamour for the Canadian government to forgive these loans.
On the side of advocating for CEBA loan forgiveness or an extension of repayment terms, the Canadian Federation of Independent Business (CFIB) has been very active. The CFIB has warned that nearly 250,000 small businesses (19% of all small businesses in Canada) could be at risk of closing their doors after 2023 unless the federal government extends the deadline for the CEBA loan repayment. They argue that if the deadline isn’t extended, small businesses will lose the forgivable portion as of December 31, 2023, which will add up to $20,000 more to their debt and cause them to face 5% interest on the full balance. The CFIB has been pushing for an extension of the repayment deadline, considering additional debt forgiveness, and implementing an appeal process for CEBA loan recipients now deemed ineligible. To further their advocacy, the CFIB has been circulating a petition, which received over 3,500 new signatures in May alone, bringing their total to over 23,000 signed petitions from small business owners calling for improvements to pandemic supports and an extension to the CEBA repayment deadline.
On the other side, opposition to the extension of the CEBA loan forgiveness deadline or further forgiveness comes from those who believe that the Canadian government has already committed significant resources to providing financial support to businesses affected by the COVID-19 pandemic. Kevin Clark, Chief Revenue Officer for Merchant Growth, one of Canada’s largest independent small business lenders, believes that extending the CEBA forgiveness deadline is unnecessary and unlikely. He argues that there are good arguments within the government that suggest the program dates should be held, as the capital for new funding programs is expected to come from the repayment of the CEBA loans. Clark also mentions the potential inflationary impact of extending CEBA debt, as well as the administrative challenges and potential confusion that could result from changing the CEBA forgiveness deadline. From his perspective, small businesses should ensure they are prepared to take advantage of the forgiveness program and manage their balance sheets as best they can. Clark believes that small businesses are better off managing the obligation now rather than taking the risk and waiting to see what happens, considering the risk of missing access to capital if the deadline indeed holds.
The Canadian government’s stance has been clear: businesses are expected to repay the remaining balance on their loan by December 31, 2023, to qualify for loan forgiveness of a portion of the amount borrowed. If the loan balance is not repaid in full by this date, businesses will miss out on the opportunity for loan forgiveness, and interest of 5% per year will be charged starting from January 1, 2024.
In contrast, some experts have outlined strategies for businesses to approach the repayment process. According to an article by Roman Agency, businesses have several options:
- Pay-off by Dec 31, 2023, and get $20,000 forgiven.
- Convert CEBA to a 5-year term at 5% interest.
- Opt for interest-only payments and a lump-sum payment at the end of the term.
- Refinance CEBA in time to get $20,000 forgiven.
Combination of Refinancing and Own Payments.
These strategies highlight the complexity of the issue and the need for businesses to make sound financial decisions based on their specific circumstances.
The CEBA loan program has been a critical support mechanism for Canadian businesses during the COVID-19 pandemic. As the repayment deadline approaches, businesses must carefully evaluate their financial situations and repayment strategies. While there has been some public advocacy for loan forgiveness, the Canadian government has not indicated any plans to forgive these loans in their entirety. It’s crucial for businesses to plan accordingly and seek financial advice if necessary.