How to benefit from the CEBA Loan Forgiveness Scheme if you don’t have $40,000
By Arthur Dubois | Published on 10 Aug 2023
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The Government of Canada launched the Canada Emergency Business Account (CEBA) scheme in April 2020. At the time, this measure aimed to help small businesses and non-profits navigate the challenges from the COVID-19 pandemic. Between 2020 and 2021, CEBA distributed a total of $49.2 billion to 898,271 organizations across the country.
In essence, the CEBA offered loans of up to $60,000 to business owners and non-profits. The government disbursed these loans on an entirely interest-free basis by more than 220 financial institutions nationwide. The ‘deadline’ to repay the loan arrives December 31, 2023. For now, borrowers stand to benefit from a maximum of a 33% loan forgiveness if they repay all CEBA-borrowed proceeds. For example, if you borrowed $60,000 from CEBA, you would only have to repay $40,000 by December 31, 2023.
Failure to repay the full amount though will result in convertion to a 2-year fixed-term loan (due December 31, 2025). It comes with an annual interest rate of 5%, with principal and interest payable on a monthly basis.
CEBA Loan Forgiveness: A Race Against Time
Therefore, business owners and non-profit managers have strong incentives to make the repayment prior to or on December 31, 2023. However, where do you find the funds? Clearly, only 10% of borrowers have repaid the amount they borrowed under the CEBA scheme.
The Canadian Federation of Independent Business (CFIB) has issued a dire warning. It states close to 250,000 small businesses may be forced to shut down if the repayment deadline is not extended.
There are several challenges that small businesses face in terms of repayment. A lot of business owners were forced to remain closed through the pandemic. This hampered their ability to generate new revenues until the lockdowns and COVID restrictions eased. Others have expressed that the repayment would divert funds they could reinvest into their business. Instead, these funds would lift them back up to pre-pandemic levels.
Despite the myriad challenges though, business owners have multiple options. They can capitalize on the loan forgiveness incentive even if they do not necessarily have the cash available. How? Let’s look at the options.
Chartered Banks
Canadian chartered banks include the Big Six (RBC, Scotiabank, TD, BMO, CIBC and National Bank), amongst others. They offer term loans with pre-set durations and lines of credit (revolving loans) on a secured or unsecured basis. As a result, they can offer a business owner the flexibility they require.
A line of credit may be more prudent if your business typically goes through seasonal cycles. In that case, you may want to protect your cash flow to weather off-season months via a line of credit. Therefore, you pay back the CEBA loan while using cash flow from operations to fund day-to-day business obligations.
Chiefly, chartered banks may offer comparatively lower rates than other options including credit cards and merchant cash advances. However, application processes are typically lengthier and qualification is subject to stringent standards of credit due diligence.
Online Lenders
In the modern economy, the rise of online lenders has provided many business owners with substantially more financing optionality than their predecessors. Online lenders typically have shorter application processes than brick-and-mortar establishments such as the chartered banks. Similar to chartered banks, they offer term loans, lines of credit, and may even have other flexible options such as merchant cash advances.
Online lenders such as Journey Capital and SharpShooter Funding have a special focus on supporting small- and mid-sized businesses, and generally offer financing to a wider range of customers than chartered banks that focus primarily on customers of the highest credit quality.
The primary advantages of online lenders are that they represent a viable option for business owners that may not fit the risk parameters of a chartered bank. However, if in-person service is important to you as an owner, most online lenders do not have a physical branch presence.
Merchant Cash Advances
MCAs are a form of financing designed to offer more flexibility compared to a traditional loan. The archetypal loan requires repayments at a fixed cadence (usually monthly). On the other hand, MCA providers such as 2M7 Financial Solutions operate by providing an advance to businesses based upon their monthly revenues. The amount of the advance is typically between 100% – 125% of revenues. The MCA gets paid back by ‘witholding’ a pre-fixed percentage of each dollar of future revenue until full repayment. In other words, as the business makes each new sale, a pre-determined percentage of that sale becomes immediately remitted to the MCA provider.
Advantageously, an MCA aligns with the business’s cash flow cycle. In periods of low revenues, the business does not have to adhere to a pre-set commitment of repayment like a traditional loan. Repayments are directly correlated with the volume of revenue generation. On the other hand, MCAs can potentially hinder cash flow due to the frequency of remitted payments.
Credit Cards
Business credit cards are another option to bridge a potential funding gap for the CEBA loan repayment that would enable a business to receive the loan forgiveness incentive. Similar to personal credit cards, the business credit card offers immediate cash upfront before repayment through the course of the month.
With this viable short-term funding option (usually within a month), business credit cards charge the highest rates of interest on an APR basis than any other debt financing option. As such, use them prudently and only if you can repay the amount charged on the credit card for the CEBA loan repayment in short order.
FAQs About the CEBA Loan Forgiveness
The deadline to receive the loan forgiveness benefit is December 31, 2023. If the loan is not repaid by then, the remaining borrowed amount will convert into a 2-year loan due December 31, 2025 with a 5% annual rate of interest.
Make repayments to the CEBA loan through the financial institution you obtained the loan from. The institution may have digital banking capabilities or you can deposit a check or cash directly at a branch in-person.
For the Payroll stream of the CEBA loan program, eligible businesses included those that had total payroll expenses in the 2019 calendar year of $20,000 up to $1.5M. For the Non-Deferrable Expenses stream, you must meet the payroll criteria. Further, the business also had to have between $20,000 to $1.5M of non-deferrable expenses in the 2020 calendar year. Additionally, all businesses receiving the loan had to be a sole proprietorship, partnership or a Canadian-controlled private corporation with active operations and an active CRA Business Number as of March 1, 2020.
Up to a third of the CEBA loan becomes forgivable if repayment occurs by the December 31, 2023 deadline. If a borrower took out the maximum $60,000 available under the program, timely repayment would mean that $20,000 of the total loan is forgivable. However, the exact percentage depends on when the loan arrived and how much you borrowed. Applicants receiving the initial $40,000 qualify for up to 25% forgiveness if they meet the deadline. Applicants who received the $20,000 expansion will receive 50% forgiveness for repayment prior to or on the deadline.
The initial loan amount goes as follows: DR Bank and CR Loan Liability Account (CEBA). Each subsequent repayment then follows the opposite, i.e., CR Bank and DR Loan Liability Account (CEBA) until the CEBA account is zero. If you make the repayment before December 31, 2023 and get loan forgiveness amount, the adjusting entry would be DR Bank and CR Other Income Account. This will ensure that the loan forgiveness amount gets recorded as income received from operations outside the usual course of business.
The Government of Canada had initially extended the loan repayment deadline from December 31, 2022 to December 31, 2023 for all eligible borrowers in good standing to avail the loan forgiveness incentive. There have been no subsequent changes since then.
The CEBA loan only becomes personally guaranteed for sole proprietors or partnerships. If you borrowed the loan as a corporation, no personal liability applies.
