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Small Business CEBA Loan Repayment

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The view from Indoor Golf

We’re an indoor golf small family business operating in Toronto since October 2018. We’re getting ready to welcome our customers back for our sixth season on October 12th, 2023. However, we’re distracted by the government’s recent announcement regarding repayment of the CEBA loan program (Canada Emergency Business Account). We believe the policy could prove to be devastating for the Canadian small business economy and harmful to the Canadian economy generally. In the blog below, we’ll step through the most important aspects of the CEBA program and offer an alternative policy solution that serves the interests not only of small business, but also government finances, the Canadian banking sector, and the communities in which small businesses operate. We are all stakeholders in the Canadian economy. Our proposal is presented in section 7 below. Jump to that if you are curious. We hope you are!

1. Background:

The financial impact of COVID lockdowns still lingers. Toronto small businesses, especially in the hospitality industry, suffered some of the most severe mandatory closures of any sector in any city of the world. Some, such as indoor golf and others only able to offer their business services in-person, were closed completely with zero revenue and net negative cashflow. The Canadian Federal Government’s (CEBA) was a very welcome, and absolutely necessary, financial lifeline to provide small businesses with a chance to survive. We were very grateful for it.

On September 14th 2023, the federal government made their final decision regarding repayment of these CEBA loans. We have a view on that decision. Our opinion does not seek to take a party-political leaning; we are members of the Canadian small business economy, and the interests of that community and their employees is our primary focus here. 

2. What is the CEBA Program?

The CEBA program was established in April 2020 in the early days of the COVID-19 pandemic to provide emergency financial assistance to Canadian small businesses impacted financially due to lockdowns and reduced economic activity. The program originally provided interest free loans of up to $40,000 with $10,000 being forgivable if full repayment ($30,000) was made by the original repayment date of December 31st, 2022. Subsequently, as pandemic economic conditions continued for small businesses, in December 2022, the government increased the available loan size to $60,000 (CEBA Expansion), with a total of $20,000 being forgivable if repaid by the original repayment date of December 31st, 2022. Because of continued financial vulnerability in the Canadian small business economy, in January 2022, the government later extended the forgiveness eligible repayment deadline by a year to December 31st 2023. The final repayment deadline without forgiveness was then December 31st 2025.

In 2023, where small business owners continued to experience significant financial challenges, not least due to severe inflationary pressures, campaigning was undertaken to seek further government accommodation regarding the final CEBA repayment date to preserve the loans’ forgivable portion. Losing up to $20,000 in the forgivable portion is a large sum for most small businesses, and sizable enough for many not to survive. The primary advocate for a further extension of the forgivable component repayment deadline was the Confederation of Independent Business (CFIB), led by Dan Kelly. The small business community then waited anxiously for further news until the government’s announcement of September 14th 2023. The news on that day was at best, extremely disappointing for some, and horrifying for others.

The CEBA loan program was originally expected to be $25 billion in total size. After the $20,000 CEBA Expansion and additional loan applications, the CEBA program size finally totaled $49.2billion with almost 900,000 individuals loans being approved. 

3. What are the government’s new (& apparently final?) CEBA loan repayment terms?

On the 14th of October 2023, the government announced what currently appears to be their final terms for CEBA loan repayment. It contains two key changes:

  1. An extension of only 18 days for CEBA loan repayment retaining the original forgiveness portion to January 24th, 2024
  2. An extension of the final CEBA loan repayment date without any loan forgiveness portion to December 31st 2026 (from December 31st 2025). From 18th January 2024, small businesses who have not repaid their CEBA loans will see their full outstanding loan balance transformed to a three year fixed loan of 5% per annum (or from March 28th, 2024 if they have submitted application for an alternative commercial bank loan by January 18th).

With retention of the forgiveness portion (up to $20,000) being hugely significant to small businesses, the extension of that repayment date by only 18 days is an almost insignificant accommodation. The extension of the final repayment date without loan forgiveness to December 31st 2026, likely kicks the can of small business financial stress down the road for those who have no choice but to select that option. As we will address below, many businesses may discover that they have no option in early 2024 other than completely deferring repayment to December 2026, losing the $10,000 – $20,000 forgivable portion completely.

4. What is the likely impact of the CEBA loan repayment terms?

The impact of the government’s decision could be devasting to Canada’s small business economy. The CFIB estimates that 250,000 Canadian small businesses could be in jeopardy as a result of the government’s decision. The restaurant small business industry is one of particular concern as represented in this Global News report.

Given the scale involved, the government’s decision could be very harmful to the Canadian economy in general. However, most of those impacts will not be felt immediately; they will partly emerge in Q1 2024 when small businesses struggle to receive approval for bank loan financing enabling repayment of CEBA loans with forgiveness. Further pain will emerge in 2024-2026, the finally in December 2026 when the full repayment of CEBA loans without forgiveness becomes due.

Many Canadian small businesses have still not recovered from the financial tsunami of COVID. This is especially the case for those who could not conduct any business during mandated lockdowns. This is the case with the indoor golf business amongst other similar examples, especially in the hospitality industry. In the period since, some will have experienced increases in rent, and all will have suffered the impact of inflation in both input and staffing costs. These businesses operate within a highly competitive capitalist economy akin to that which was understood by Adam Smith. It has few barriers to entry and an inability to set pricing that passes inflation onto the end consumer. That is a very different business experience compared to the big businesses that operate in oligopolistic markets with price setting power that passes inflation directly onto consumers.

In tandem with the inflationary impact that is already baked into small business costs, in 2024 and 2025 we are likely to experience significant contraction in discretionary consumer demand as interest rate hikes bite hard on household finances. This is especially the case where the impact of 2-3 year fixed rate mortgages taken during the house price boom of COVID reset at much higher interest rate levels. That represents a worrying economic outlook, particularly for small businesses who tend to be more vulnerable to such discretionary spending contraction than big businesses who dominate non-discretionary consumer markets with less elastic demand such as grocery products and mobile phones.

As mentioned above, achieving bank loan approval to refinance CEBA loans retaining loan forgiveness in Q1 2024 could become very challenging for many small businesses There is no guarantee that the Canadian banking sector will take on these loans and many small businesses could be in for a major financial shock when their loan applications get rejected. The banking sector is also very mindful of worsening economic conditions and the risk of increased bad loan provisions and actual loan defaults in commercial, retail and real estate lending. Indeed, beyond the credit exposure angle, the sheer volume of small business loan applications for refinancing CEBA could be overwhelming, and beyond the banking sector’s administrative capacity to undertake with any acceptable level of due diligence to individual applications. Bank rejection of CEBA loan financing applications could become the default outcome. In this scenario, small businesses seeking to retain their CEBA loan forgiveness portion may be forced into the non-bank lending arena at extremely punitive interest rates which are still preferable to losing the $20,000, but then only marginally. A large number may be forced to defer any repayment of their CEBA loans until the final repayment date in December 2026, losing the $10,000 – $20,000 forgivable portion. 

5. How are the CEBA loan repayment terms being presented and interpreted publicly?

This aspect is particularly interesting to us. Informed public opinion matters. Alternative policy options matter. We have seen little of either from any political party or business commentators in the media.

As detailed in section 2 above, the government’s October 14th 2023 decision contains two key components; (1) the date extension of the forgiveness eligible portion by a meagre 18 days to January 18th 2023, and (2) the extension of the final repayment of CEBA loans without forgiveness to December 2026. For the vast majority of small businesses, the first component is far more significant than the second component. However, the government’s communications and Liberal MPs’ reaction to the matter have focused on the benefits of (2) with little to no consideration of (1). Perhaps that’s just politics, but the media coverage of this important issue has hardly been much better. Initial media headlines are important to the immediate public perception of issues, and those below are arguably a significant misrepresentation of the government’s damaging decision from a small business perspective. But those headlines may have been enough for the majority of the public to perceive a superficially positive story and then quickly move on.

Some media outlets did explore the CEBA repayment policy with greater balance, but then only in the much less viewed opinion pages as below in the Globe and Mail:

More critical analysis of policy such as this Globe and Mail Opinion piece is very welcome and necessary. It needs to be prominent. But we also need the proposal of alternative practical policy solutions.

6. Why did the government choose these CEBA loan repayment terms?

While we do take issue with the government’s decision and the distractive rosy light that both they and much of the media elected to shine upon it, we do to some extent understand the government’s challenging predicament in relation to CEBA loan repayment. We do not believe the government is maliciously attempting to stress the Canadian small business economy. However, we believe the government has crafted a poor policy without considering all of the damaging consequences and alternative policy options.

The total CEBA loan size of $49 billion offered interest free to small businesses is a very large sum of money. The government significantly financed CEBA and other COVID financial assistance programs in 2020/21 in the 3-5 year debt maturity window when government borrowing could be financed relatively cheaply. Since then, we’ve experienced rampant inflation and correspondingly massively increased interest costs for both the government, businesses and households as the Bank of Canada seeks to bring inflation back within target range. From the perspective of government financing optics alone, it seems reasonable that the government should either seek as much direct repayment of CEBA loans as quickly as possible or pass the funding responsibility for CEBA refinanced loans into the commercial banking sector. This will both reduce the government’s headline debt financing cost burden and overall Debt/GDP ratios. Those statistics are important to perception in government debt markets and to financial market commentators. However, effectively ‘reprinting’ maturing debt to roll the bulk of the government’s CEBA program funding could also lead to accusations of fiscal irresponsibility.

Ultimately, the government’s decision appears to be a political prioritization of government borrowing statistics in preference to responsible management of the real Canadian economy. Risking severe damaging the small business economy may be a convenient path of least political damage in the short term, especially if the matter is largely ignored in the public arena.

7. What alternative CEBA loan repayment terms could still be possible?

This is the most important point of all. We propose that CEBA loan repayment should be structured along similar lines to the below and for the reasons we then explain:

A. Reduce the January 2024 CEBA Repayment Amount (with forgiveness retained):

Retain the FULL forgiveness component for all CEBA loans until December 2026 repayment if:

  1. $15,000 is repaid by January 18th for CEBA loans up to $40,000 (half of $30,000 currently due)
  2. $20,000 is repaid by January 18th for CEBA loans up to $60,000 (half of $40,000 currently due).

Having repaid these amounts, small businesses should then repay their outstanding, with-forgiveness, interest-free CEBA loan balances by the government’s current December 2026 deadline (unless the deadline needs to be further extended due to severe economic conditions). 

B. Government (Partial) Guarantee to the banks for CEBA refinancing loans:

The government should underwrite (guarantee) a very substantial part of the commercial bank loans taken by small businesses who seek bank refinancing to meet the partial CEBA loan repayments in (A). The level of guarantee to be appropriately determined (e.g. 75%).

C. Retain the Final CEBA Repayment Date (Dec 2026):

Where no CEBA loan repayment is made in Q1 2024, the transformation to a 5% term loan due for full repayment without forgiveness in December 2026 should be retained, as per current government policy.

Why is this a much better CEBA loan repayment alternative?

I) Increasing the number of businesses repaying CEBA in January 2024:

The current $30,000 and $40,000 CEBA loan repayment requirements for January 18th 2024 will be beyond reach for a vast number of small businesses. We believe that a much greater number will be able to repay half of those amounts in January 2024 and then retain the CEBA loan forgiveness portion. The resulting total CEBA loan repayment amount the government receives in January 2024 may not be much less than under the current government policy. It will reduce the government’s CEBA related debt burden significantly.

II) The Partial Government Guarantee to the Banks Incentivizes them to Lend: Credit Risk

Where small businesses cannot directly meet the partial CEBA repayments in (A) and elect to apply for government guaranteed commercial bank loans (B), the banks will have greater confidence to approve those refinancing loans from a credit risk perspective. The banks will also be able to manage the huge volume of loan applications with less due diligence burden than would be necessary without a government guarantee.

III) Bank Capital Efficiency:

The banks will then carry the partially guaranteed CEBA refinancing loans on their balance sheets at lower capital risk weight and capital cost.

IV) Lower CEBA refinancing Interest Rate Cost to Small Business:

At lower risk and capital cost with a government guarantee, the banks will be able to offer the loans at a much lower interest rate than without a partial guarantee.

V) Small Businesses still incentive to repay in January 2024:

The bank refinanced loans will also not be cheap given prevailing interest rates. Small businesses with the available cashflow will still be incentivized to make the $10,000 and $15,000 partial CEBA loan repayments directly (i.e. this is not more free money).

VI) Fewer CEBA Repayments pushed in Full to December 2026:

This CEBA repayment schedule will reduce the number of CEBA borrowers who elect to pay nothing in January 2024. Repayments either from their own small business funds or resulting from bank refinancing will help the government identity where they may have made CEBA loans to borrowers who have no ability (or even intent) to repay their CEBA loans in full by December 2026. It offers the government insights to the CEBA credit risks it has undertaken. Currently that risk profile is unknown and will remain unknown for the loans that defer repayment entirely to December 2026.

VII) More Small Businesses Survive:

Vastly more legitimate small business CEBA borrowers will have a chance to survive.

VIII) Avoiding the Risk of “#TooSmalltoMatter” v “TooBigtoFail”

There is remote risk that the financial industry could experience severe stress within the next couple of years. Government financial assistance could be required. The government should not risk having to make such decisions where there are simultaneous decries of “TooSmalltoMatter” and “TooBigtoFail”.

A note on the proposed government guarantee: Via the Canadian Mortgage and Housing Corporation, the government effectively guarantees securitized mortgage bonds to encourage bank lending to the residential housing market. This is, in part, a contributor to inflated house prices in Canada. Houses are not an economically productive asset. Small business is an economically productive asset. Therefore, a government guarantee of CEBA refinancing loans made by the major commercial banks is justified by comparison.

8. What does small business mean to Canada?

I won’t elaborate in detail here. This blog will be long enough. However, we should be aware of the significance of small business to the Canadian economy. The government itself explains this well on their Statistics Canada website. Beyond the financial stress and unemployment that will result, the partial destruction of the Canadian small business economy resulting from the government’s CEBA policy will have directly visible impacts on the neighbourhoods where we live.

One of Swing Golf Lounge’s owners, Keith, originates from the UK. When I emigrated to Canada more than a decade ago, I was delighted to see a thriving small business economy in vibrant local neighbourhoods near us in Etobicoke. This contrasted with the slowly dying high streets in most UK towns and cities that we had left behind. Those high streets are now typically dominated by big brand coffee shops, real estate agencies, pound (dollar) stores, charity shops and sadly, boarded up shop fronts. So many of the independently owned have vanished. Those high streets feel lifeless and downbeat. This impacts the local communities in a very negative way. This is well documented in the UK press. In part this has been driven by the shift from the high street to big box shopping parks and online sales. Even without the financial stress of the government’s CEBA repayment policy, our Canadian small businesses face similar pressures. We believe that local communities here in Toronto, the GTA and beyond, do not want their high streets to meet the same, potentially irreversible, economic fate.

9. What can small business do better to represent itself within the Canadian economy?

We believe the small business community needs to be much more active in representing its own interests and those of its employees and local communities.  We cannot only rely on the CFIB and Dan Kelly. Big business represents itself very effectively in the corridors of power. As a fundamental component of the Canadian economy, we should also be making our elected representatives aware of our presence and views when important matters arise. We also need to encourage the media to talk more about the small business economy, moving beyond the myopic focus of the TSX60. 

Finally………….

We’re just a Toronto indoor golf business. We aren’t government policy makers. But we do believe that bad ideas sometimes emanate from ivory towers at the top, and very good ideas can emanate from the ground up in the real economy. If you’re amongst the very few that will read this to the end, or even at all, thank you. We hope it made sense and provoked further thought and curiosity.

References:

  1. Global News, 16 Sept 2023: “With 51% of restaurants struggling, CEBA extension not enough: industry group” https://www.msn.com/en-ca/money/other/with-51-of-restaurants-struggling-ceba-extension-not-enough-industry-group/ar-AA1gMSGg
  2. Globe and Mail, 17 Sept 2023: “Big Six banks open to refinancing CEBA loans for small businesses” https://www.theglobeandmail.com/business/small-business/article-big-six-banks-open-to-refinancing-ceba-loans-for-small-businesses/
  3. Statistic Canada: “Analysis on small business in Canada, first quarter of 2022” https://www150.statcan.gc.ca/n1/pub/11-621-m/11-621-m2022004-eng.htm
  4. The Guardian, 17 Sept 2023, “We shed crocodile tears over our high streets then click online and finish them off” https://www.theguardian.com/commentisfree/2023/sep/17/we-shed-crocodile-tears-over-our-high-streets-then-click-online-and-finish-them-off

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