I know that you’ve probably tried to block the year 2020 out of your head. I know that I try on more than one occasion.  Every person who was running a business and trying to make sense of the chaos of Government grants at that time will remember that uncertainty and the scrambling as we tried to keep our doors open.  Thankfully, it’s over and most of us were able to take advantage of some of the Government subsidies that were available.  

The Canada Emergency Business Account (CEBA) program was one such subsidy.  Just as a refresher for you, here is what it was. 

The Canada Emergency Business Account (CEBA) program provided interest-free loans to eligible small businesses and not-for-profits to provide support during the COVID-19 pandemic. There were two phases to the program, the first was a $40K loan, and the second was a $20K loan.  

Unlike other subsidy programs, this one was actually a LOAN, that has to be repaid back.  The initial repayment deadline was extended, and is now fast approaching.

Let’s get into the ins-and-outs of the CEBA loan repayment and what you as a Canadian small business should be doing to prepare.

CEBA Loan Repayment and Forgiveness

There were two real components to the CEBA Program.  The first is that it was and still is, interest free.  

Interest

The CEBA loan has been interest free and will continue to be until December 31, 2023. 

Beginning on January 1, 2024,any balance owing on this loan becomes interest bearing at 5% per annum interest. The interest payment frequency will be determined by your financial institution that holds the loan. 

Repayments and Maturity

No principal or interest repayments are required prior to December 31, 2023. If there are loans outstanding past that date, however, only interest payments are required until the full principal repayment is due two years later on December 31, 2025.

Debt Forgiveness

The second component of the CEBA program was a forgiveness portion.  If you met the eligibility criteria (as set out back in 2020) the Federal Government was prepared to “forgive” some of the loan provided and a lower principal balance needs to be repaid by you. 

If you borrowed $40,000 or less in Phase 1 of the Program, you are eligible for a loan forgiveness of 25%. 

If you borrowed between $40,000 and $60,000 in Phases 1 and 2, you are eligible for loan forgiveness of 25% on the first $40,000, plus 50% on the amount above $40,000 and up to $60,000.

Yes, even the repayment calculation can be confusing, but here’s the summary.  If you received the full $60,000 CEBA loan that was available, the loan forgiveness is $20,000 and the amount that has to be repaid is only $40,000. 

Yes, you read that correctly, you have to repay only $40K of a $60K loan.  BUT…and here’s the important part.  You are only eligible for the forgiveness portion IF you repay the $40K balance on or before December 31, 2023.  

If you roll your CEBA balance into an interest bearing loan on January 1, 2024, you will have to repay the full $60,000 principal by December 31, 2025 (plus the interest for the next two years)!

Preparing to Repay Your CEBA Loan

As you can tell, there are some serious benefits to completing your loan repayment prior to the December 31, 2023 deadline. Repaying your outstanding principal loan (except for the amount eligible for forgiveness) before the end of this calendar year will allow you to avoid accumulating any interest, but more importantly it allows you to benefit from the CEBA loan forgiveness. 

That means up to $20,000 saved in loan forgiveness alone if you repay your outstanding principal loan by the end of this year.

We’re about halfway through 2023, which means that you have approximately six months to prepare to repay your CEBA loan if you’re interested in reaping these benefits. Here are some options to consider that could help you to meet that December 31, 2023 deadline.

Start Putting Money Aside

It’s simple but it’s effective: put money aside in preparation for the repayment date! Like a squirrel preparing for winter, it’s much easier to generate the money you need in small amounts throughout the year as opposed to scrambling to pull together a lump sum right before the due date.

Calculate the amount of money owing and break it into weekly or monthly amounts to be spread across the remainder of this year. This will keep your sights set on the target deadline and create a much more reasonable repayment process, with a lot less stress along the way. If you received the full $60K, you need to be putting aside $6667/month to ensure that you have the funds for December.

Consider an Existing Line of Credit

If your business is not in a position to reasonably produce the outstanding principal amount owing by December 31st of this year, one potential option at your disposal is to utilize an existing line of credit.

This option is not for everyone, and it depends greatly on the details of your business’ financial situation. However, the potential loan forgiveness offered for loans that are repaid by the end of the year is significant, and it can have a significant impact on your business. 

Dipping into a line of credit in order to benefit from the CEBA loan forgiveness may be a savvy move that will benefit your business. The interest rate that you would pay on the Line of Credit wouldn’t erode the gain you will have received on the loan forgiveness. (Even with these crazy inflationary interest rates). 

We strongly urge you to discuss this option with your accountant, bookkeeper, or financial advisor to determine if it could be the right path for your business.

2020 was a struggle for many businesses and we know that not everyone has recovered from the downturn in their industries, which is why we hope that by providing you with this information in advance of the repayment deadline, you’ll be able to take advantage of the loan forgiveness.  We know that every dollar makes a difference for businesses. 

Interested in learning more about running a small business in Canada, handling your business’ finances, and making smart decisions that set you on the path for success? Book a call with AIS Solutions today. We provide professional accounting, bookkeeping, and tax planning services that help small businesses in Canada to thrive.