The Canadian Emergency Business Account (CEBA) provided vital financial support to businesses during the turbulent times of the pandemic. While CEBA loans offered a lifeline to Canadian businesses, the need for repayment looms on the horizon. In this comprehensive guide, we will delve into the intricacies of CEBA refinancing, exploring various alternatives for repayment, considering the costs, and examining the impact on your business’s financial health. By understanding these options, you can make an informed decision that aligns with your business’s unique circumstances and secures its future.
The CEBA Dilemma:
With the prospect of up to $20,000 in loan forgiveness on the table, many small and medium-sized businesses (SMBs) in Canada are exploring ways to maximize the benefits of government incentives. The CEBA loan agreement offers an escape route: if a company lacks the necessary funds to repay its CEBA loan by the deadline, refinancing becomes an attractive option. However, one size does not fit all when it comes to CEBA refinancing, and businesses must carefully assess their choices. This article will equip you with the knowledge to navigate the alternatives effectively, considering the impact on cash flow, the total cost of borrowing, and your business’s long-term sustainability.
Understanding the Options:
Before we dive into the details of CEBA refinancing, it’s essential to understand the primary options available to businesses. The four key alternatives that we’ll explore are:
Continue with the CEBA Loan:
- This is the default option, often considered the “do-nothing” approach. However, it’s crucial to understand the costs associated with this choice, as it has implications for your business’s finances.
- Bank or Credit Union Financing: If your business enjoys a strong credit rating, you may qualify for financing from traditional financial institutions. This option allows you to leverage government forgiveness, which eliminates the need to repay the $20,000 forgivable portion of the loan. Bank or credit union financing usually offers a relatively low-interest rate, but it comes with a few conditions.
Alternative Lender Financing:
- Many SMBs may not meet the criteria for traditional bank financing. Still, they have the option of alternative lender financing, which specializes in supporting small and medium-sized businesses. This form of financing differs from traditional banks and often requires weekly payments. We’ll explore the implications of opting for this alternative.
Other Forms of Financing:
- Besides the discrete alternatives mentioned, businesses may also explore a combination of existing cash and financing to refinance their CEBA loans. This approach provides flexibility but comes with its challenges.
Assumptions and Scenarios:
To provide a clear comparison of these options, we will make several assumptions to create a level playing field for analysis. These assumptions are based on the most likely scenarios for small and medium-sized businesses:
- The business holds a $60,000 CEBA loan.
- The business qualifies for the $20,000 loan forgiveness.
- The business applies for loan refinancing with their financial institution before January 18, 2024, thus moving the repayment deadline to March 28, 2024.
- Monthly interest payments are calculated, even though actual payment periods may vary slightly.
Exploring CEBA Refinancing Options:
- Continue with the CEBA Loan:
- This “do-nothing” approach entails a 33-month repayment period from April 2024 to December 2026, with a 5.0% annual interest rate. Monthly payments amount to $250, and the total cost is $68,250. The advantage here is the manageable monthly cost, but the full principal of $60,000 must be repaid before December 31, 2026.
- Bank or Credit Union Financing:
- With a strong credit rating, businesses can enjoy the benefits of government forgiveness while securing a relatively low-interest rate.
- Monthly payments are fixed, ensuring that the loan is amortized over 33 months. For a $40,000 loan, even at a 15% interest rate, the total cost remains lower than continuing with the CEBA loan, saving more than $10,000. However, the monthly payment is higher, which could impact current cash flows.
- Alternative Lender Financing:
- For businesses that don’t qualify for traditional bank financing but have a decent financial standing, alternative lender financing can be a viable option. These lenders often use factoring rates and require weekly payments. We’ll explore two scenarios – a 24-month term with monthly payments of about $2,400, and a one-year term with monthly payments slightly exceeding $4,000. Both scenarios offer significant savings compared to continuing with the CEBA loan but require a higher monthly payment.
- Other Forms of Financing:
- This option provides flexibility for businesses to combine existing cash with external financing or even consider selling equity. While it may take longer to secure, it can provide an attractive head start, particularly when the potential for interest savings is significant.
Business owners contemplating CEBA refinancing have several options at their disposal, each with unique benefits and challenges. The table below provides a quick summary of the monthly payments, total payments, and credit requirements for each option, helping you assess the best fit for your business’s specific needs.
Option Term (months) Monthly Payments Total Payments Credit Needed Continue with CEBA 33 $250 $68,250 None Bank or Credit Union Financing 33 $1,500 $49,000 Good to Very Good Alternative Lender Financing 24 $2,400 $56,800 Poor to Good Alternative Lender Financing 12 $4,000 $48,400 Poor to Good
When it comes to CEBA refinancing, one size does not fit all. Business owners must carefully evaluate the options, considering their financial situation, cash flow, and long-term business goals. Talking to your financial institution is crucial to finding the best solution, whether it’s traditional bank financing or alternative lender financing. Making an informed choice can save your business significant costs and set it on a path to financial stability.