What is Canada Emergency Business Account (CEBA) Loan?
The COVID-19 pandemic lockdowns hurt a lot of small and medium-sized businesses across Canada that were struggling just to keep their lights on. Many businesses didn’t survive and went out of business.
In order to help small businesses, the Canadian federal government set up the Canada Emergency Business Account Loan program (CEBA).
CEBA offered interest-free loans of up to $60,000 to small businesses to help them through the difficult time.
The government paid out almost $50 billion to over 900,000 Canadian businesses through this CEBA program.
Terms of the CEBA Loan
Like every loan, it had to be repaid… but with an incentive, a twist: the government would forgive up to $20,000 of the loan if the rest was paid off by December 31, 2022.
However, due to increased business costs from inflation and high interest rates, most businesses could not pay off the loan by this 2022 deadline. The government extended it to January 18, 2024.
So here we are looking down the barrel of another deadline.
What Happens If Your Business Can’t Pay Back Its CEBA Loan?
After January 18, CEBA loans convert automatically from a zero interest loan to a non-amortizing term loan at 5% with full principal repayment due by December 31, 2026.
How Do You Pay Off the CEBA Loan?
There are effectively three things you can do:
1. Pay off your CEBA Loan if you have the cash to OR if you can get the cash at a cost lower than 5% interest.
The federal government is encouraging businesses to take out bank loans to pay off their CEBA loans. In the current high interest rate environment in which the Bank of Canada held its interest rate at 5% on December 6, 2023, that seems like a reckless piece of advice.
You would be taking on higher-interest debt at a bank, which charges higher than 5%, to pay off lower-interest debt at 5%.
Of course, business is simply about income and expenses. If you believe that your business will earn a high enough income to cover the bank interest expense, then taking on this new debt could work out just fine for you.
2. Let the CEBA Loan convert to 5% term loan
Alternatively, you could just let it ride. Let the interest-free loan convert to a 5% term loan.
In this environment of high interest rates, a 5% loan is not that bad. Debt is all relative. The CEBA Loan could be the lowest-cost debt on your business balance sheet relative to other debt.
3. Pay off your CEBA Loan with higher-cost cash
Sometimes in business you don’t have the luxury of having many options. Sometimes it’s just about surviving another year as you try to improve your business finances. Sometimes it’s about just staying alive. As such, you may have to take on higher-cost cash to pay off loans that come due.
Maybe you borrow cash from family members or friends on more lenient terms than a bank would offer, to pay off your loan. The high cost is the risk of your relationship with these people being damaged if you can’t pay them back in time.
Maybe you bring in an investor partner into the business who supplies the cash to pay off the loan. The investor receives equity in the business, which is the highest-cost cash or funding. And the investor understands that he may never get paid back if the business income can’t afford it or unless you sell the business.
Maybe you set up a hybrid debt-equity deal like revenue-based financing with the investor. A deal structure in which the investor receives a percentage of gross revenue plus interest (or cap) until his investment is paid off.
You could even convert the family member or friend’s loan to the equity or revenue-based financing deal.
Get Creative to Solve CEBA Loan Problems like All Small Business Debt Problems
In a nutshell, in business, you must get creative to survive and thrive. If your CEBA Loan is coming due, take a few hours to sit down with a pen, pad, and calculator, and THINK.
Every problem has a solution. Your solution is unique to your specific business and situation.
If you need help, send us your business information through the Loan Request form here and we’ll work on finding a solution for you.
Or you could compare instant free Loan Quotes here.
It’s always recommended to engage the very best business loan brokers in Canada to assist you in solving complex business loan problems.