With the January deadline for refinancing Canada Emergency Business Account (CEBA) loans approaching, many small businesses find themselves at a crossroads.
The decision to refinance is not one to be taken lightly; with almost $50 billion in CEBA loans across nearly 900,000 companies, and only 28% of CEBA borrowers have fully repaid their loan, there’s a lot on the line. It has far-reaching implications for business operations, cash flows, and overall financial health. Yet, amidst the uncertainty and confusion, one thing is clear: refinancing CEBA loans is a no-brainer for viable businesses who are caught short of cash by the early repayment deadline.
The Urgent Call for Small Businesses to Refinance CEBA Loans
Considering the impending deadlines and broader economic challenges confronting small businesses, refinancing CEBA loans holds paramount importance. The up to $20,000 of loan forgiveness (1/3rd of the original loan, for most CEBAs) if repaid by the early repayment deadline, is a considerable incentive. The looming deadlines accentuate the urgency for businesses to seize this opportunity before it closes, ensuring they can benefit from the favorable terms offered by the government — especially as they grapple with various economic pressures, such as increased operating costs, supply chain disruptions, and market uncertainties.
While some lobby groups hope for a government extension to the early repayment deadline, the chances of this coming through at this point are extremely slim to none. Extending these deadlines is not a favorable solution for the government for two main reasons. While it might appear as an easy fix, it comes with inherent pitfalls that must be considered. Firstly, broad policies, such as extending deadlines or increasing forgiveness, lack distinction between businesses that genuinely need assistance and those that do not. My company’s internal data suggests that most businesses can manage their debts without significant problems. Therefore, indiscriminate deadline extensions lead to inequity, effectively subsidizing financially stable businesses while neglecting those in dire need.
Furthermore, these broad policies have an inflationary effect, as large sums of money stay circulating in the economy, triggering inflation and necessitating government intervention through interest rate adjustments — ultimately proving detrimental for all Canadians. It’s important to avoid broad strokes and focus on aiding specific businesses genuinely in need of assistance, but which hold promise to be viable long-term businesses.
An often overlooked aspect is the loss to the government if the deadline is extended. Contrary to popular belief, granting more time does not translate to more businesses being able to repay. Small businesses are inherently risky ventures, with a certain percentage closing each year, while new businesses get created. It’s a sort of economic “circle of life”. But it’s the old businesses that owe the CEBA loans — not the new ones. As a result, delaying repayment decreases the total CEBA amount collected.
With the government being clear in its communication of deadlines, small businesses must now place their focus on obtaining the $20,000 of loan forgiveness. Missing out on the opportunity to refinance their CEBA loan could exacerbate the challenges faced by small businesses in the current macroeconomic landscape.
Clarifying Misinformation: Dissecting CFIB’s Position on CEBA and Providing Insights into Loan Repayment Realities
The potential adjustment of CEBA repayment deadlines has caused confusion. While it’s natural to hope for an extension, it’s crucial to be realistic. The government has established specific deadlines that are unlikely to change, so businesses shouldn’t base their financial plans on this uncertainty. Instead, explore your refinancing options, understand loan forgiveness eligibility, or seek advice on managing repayments. This proactive approach ensures your business is prepared.
However, the Canadian Federation of Independent Business (CFIB) is contributing to this confusion by advocating for a pause on CEBA loan repayments and a year-long extension to the early repayment forgiveness deadline. While the CFIB has written a blog post on their website telling business owners to prepare for repayment, they have continued to be vocal in the media with their lobbying efforts. This stance, instead of providing clarity, fosters unrealistic expectations about date changes. The CFIB could better assist its members by promoting practical solutions and offering support, shifting the focus from uncertain hopes about extended deadlines to the benefits of refinancing for business owners.
Another source of confusion involves the role of banks, credit unions, and fintech companies in the refinancing process. Some small business owners, especially those adhering to traditional methods, believe that obtaining a loan means going to a bank. It can be disheartening if a bank rejects your application, especially when other lenders might charge higher interest rates. However, missing out on loan forgiveness is a much more significant loss than saving on interest, due to the magnitude of CEBA loan forgiveness. The key is to prioritize seeking loan forgiveness whenever possible.
Banks are not the sole source of loans. In this unique situation where the government is offering significant loan forgiveness, exploring alternative lenders is crucial. If banks decline, it’s important to be aware of other options that exist.
At Merchant Growth, we’ve recently secured a substantial $300 million forward flow facility from funds managed by affiliates of Fortress Investment Group. This financial backing positions us to help refinance over 10,000 CEBA loans, facilitating small businesses’ ability to take advantage of the partial debt forgiveness opportunity offered by the federal government.
The ultimate goal is to identify what works best for your business and leverage the available opportunities. The government’s forgiveness program for eligible CEBA recipients presents a valuable opportunity for businesses to alleviate financial burdens.
Navigating the Maze of CEBA Refinancing with Financial Expertise
Refinancing CEBA loans is not a one-size-fits-all solution. Each small business faces unique challenges, has different financial needs, and operates in a distinct market context. Therefore, the need for personalized, tailored financial solutions cannot be overstated.
For instance, a business with strong cash flows and a healthy balance sheet might opt to refinance simply to maximize its working capital during an important / opportunistic period in their business. Or, they may want to borrow for only part of their CEBA repayment, and use their own cash for the remainder. They may also select a shorter loan term to save on total interest paid.
Conversely, a business that’s currently struggling with cash flow might refinance on a longer loan term with lower monthly payments, providing much-needed breathing space while still ending up significantly net positive through CEBA loan forgiveness.
In both scenarios, the refinancing decision hinges on the availability of a financial solution that reflects the business’s unique circumstances. Those able to obtain CEBA refinancing options through their bank will see the largest financial benefit — as banks always have the cheapest source of capital through regulated deposits. But at Merchant Growth we are on a mission to make CEBA loan forgiveness obtainable to as many hard working Canadian businesses as possible. The proliferation of digital-only non-bank lenders, made possible by the internet and advanced data science, promises to play a meaningful role in the wind-up of this particular COVID-era program.