The CEBA (Canada Emergency Business Account) program, established during the initial phase of the COVID-19 pandemic, offered interest-free loans of up to $60,000 to assist small and medium-sized businesses. Launched by the federal government in April 2020, CEBA loans aimed to alleviate the economic repercussions of the outbreak. Over 900,000 Canadian businesses took advantage of these loans, though many remain uncertain about their ability to meet repayment obligations.
Now, let’s delve into the efforts of associations advocating for an extension of CEBA loan repayment.
As we navigate through 2023, economic pressures persist, yet the Canadian government has refrained from outlining a repayment timeline. An integral component of the CEBA loan program was the provision of incentives for loan forgiveness, set to expire at the end of this year. These incentives offered forgiveness of up to a third of the loan value ($20,000) if loans were repaid within a specified timeframe.
Initially targeted for repayment by December 31, 2022, the CEBA repayment deadline was extended by the federal government to December 31, 2023, due to an ongoing surge in COVID-19 cases, elevated inflation, and sustained economic challenges.
Challenges Surrounding CEBA Loan Repayment in 2023
Although Canada’s COVID-19 cases have diminished as of mid-2023, the pandemic’s economic impact lingers. Industries severely affected by unprecedented economic shutdowns continue to face an uncertain path. According to McKinsey researchers, the travel and tourism sector bore the brunt of the pandemic’s impact.
In 2021, they projected a prolonged and uncertain recovery period for the sector, potentially extending until 2023. A recovery in 2023 indeed materialized, as indicated by EY’s positive outlook for the hospitality industry that year. However, high inflation and borrowing costs have hindered the capital-intensive hospitality sector from making significant strides.
Similar challenges persist in other industries, where business activity rebounded post-pandemic, yet other hurdles remain. The food service sector, for instance, grapples with labor shortages. Last June, job vacancies in food service reached 171,715, triple the pre-pandemic figures. As a response, 77% of food service businesses are raising wages, and 64% are reducing working hours.
While economic vitality has been restored in these domains, the pressure points underscore the potential delay in CEBA loan repayment.
Advocacy from Business Associations for CEBA Repayment Extension
Business groups and associations throughout Canada have voiced their request for an extension of the repayment deadline. Restaurants Canada, a non-profit trade association in the food service sector, has proposed extending the payback period by 36 months and modifying the forgivable portion of the loan.
Although demand for Canadian restaurants has resurged, representatives argue that with “half of all foodservice companies currently operating at a loss or just breaking even and 80 percent making less profit today compared to pre-pandemic (2019),” CEBA repayment deadlines could determine whether businesses continue to operate or are forced to close.
Their proposal suggests that a phased loan extension could prevent numerous restaurants and small businesses from succumbing to bankruptcy. Missing an early CEBA repayment deadline doesn’t automatically lead to default; the forgiveness incentive is forfeited, and the balance converts to a term loan with 5% interest. However, the association estimates that about 20% of restaurants that haven’t already repaid the CEBA loan may be unable to do so, given that 43% of the food service sector operates at a loss or break-even point.
The Canadian Federation of Independent Business (CFIB) also supports extending the repayment deadline. In addition to advocating for a repayment deadline in December 2024, CFIB seeks to enhance the forgivable portion of all CEBA loans to at least 50%. They also emphasize the importance of allowing recipients deemed ineligible after receiving the CEBA loan, who accepted the loan in good faith, to retain the forgivable portion if they repay the loan by the end of 2023.
Adjustments to the CEBA Program
Throughout the pandemic, the CEBA program underwent modifications to better cater to business needs. An initial modification increased the CEBA loan amount from $40,000 to $60,000. Furthermore, the federal government extended the forgiveness repayment deadline from December 31, 2022, to December 31, 2023, for eligible CEBA loan recipients in good standing. Presently, businesses unable to repay the CEBA loan by the end of 2023 will have the remaining balance converted into a two-year term loan at 5% interest. This scenario necessitates full repayment of the loan amount, with no forgivable portion.
Pros and Cons of Extending the Deadline
Extending the CEBA repayment deadline brings both advantages and disadvantages. On one hand, it offers struggling businesses additional time to recover from the pandemic’s economic impact.
Even as the world reopens and customers return, the economic challenges persist. Delaying CEBA repayment can potentially avert waves of bankruptcies and job losses, particularly in industries experiencing resurgence. Furthermore, it aligns with the reality of an uneven recovery, as sectors such as food services or hospitality grapple with a broader array of challenges that require more extended repayment periods.
However, there are potential drawbacks to extending the repayment deadline. It might inadvertently encourage fiscal imprudence or amplify the risk of businesses assuming debt they cannot manage—especially considering that many initially did not intend to incur additional debt. Since these loans are government-backed, a higher default rate could significantly impact public finances. CEBA loans were distributed based on necessity rather than traditional underwriting, indicating that many businesses might lack the financial means to repay.
While debt can be essential for survival and growth during economic adversity, extending the repayment date without modifying loan forgiveness terms or considering changes to the loan’s nature essentially defers an unattainable repayment date into the future. Although CEBA loans are interest-free if repaid by the deadline, interest applies thereafter, and the forgivable portion of the loan is forfeited.
This prolongs and increases outstanding business and government debt, negatively impacts small business owners’ credit, and raises concerns about the long-term feasibility of recovery.
Conclusion
Extending the CEBA loan repayment date offers temporary relief but requires careful consideration of potential drawbacks. As always, the particulars hinge on each business’s unique circumstances and the loan’s terms and conditions. Businesses must understand these elements and formulate financial strategies accordingly.
The associations advocating for further CEBA repayment extension present valid arguments reflecting the ongoing financial strain experienced by numerous small businesses. However, finding the right balance between these considerations and potential economic risks, along with implications for public funds, is imperative.
