Loans For Small Business In Canada – The scheme will now apply to more sole proprietorships that derive income directly from their businesses; businesses that rely on contractors; and family businesses that pay their employees through dividends rather than wages.
Fees will be subject to verification and audit by the Government of Canada. Funding will be provided in partnership with financial institutions.
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Further details, including the start date for applications under the new criteria, will be announced in the coming days.
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Our government continues to work on solutions to help business owners and entrepreneurs who operate from personal bank accounts (rather than business accounts) or who have not yet filed a tax return, such as new businesses.
The Government of Canada has provided $25 billion to businesses across the country impacted by the COVID-19 pandemic through the umbrella Business Credit Availability Program (BCAP). As part of the BCAP suite of business financial assistance programs currently being rolled out by the Government of Canada, the following two main emergency business loan streams will open next week:
Eligible businesses can borrow up to $40,000 through the CEBA facility. CEBA is a federally funded revolving line of credit available to every eligible business that applies online. The CEBA online application portal is expected to be operational next week. Expect publications from all banks once the CEBA portal opens for applications.
Eligibility: CEBA funds will be available to businesses paying annual wages between $20,000 and $1,500,000 in 2019. More details are below.
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CEBA funds will be available to businesses paying between $50,000 and $1,000,000 in annual wages in 2019. Publicly available information suggests that the funds are intended to cover non-deferrable costs such as wages, rent, insurance and utilities.
Revolving Loan, then 5-Year Loan: CEBA will be a federally funded revolving line of credit until December 31, 2020. At the end of this calendar year, it will be converted to a 5-year loan, due to mature at the end of 2025.
Interest-free period, then 5% interest: no interest will be paid in 2020, 2021 or 2022. Interest will begin charging interest on any outstanding balance at an annual rate of 5%, with monthly payments commencing on January 1, 2023 for the remainder of the interest term for a three-year term through the end of 2025.
Repayment Term: The outstanding balance and applicable interest will be due and paid in full by the end of 2025. No comments or concessions have been made on the amount outstanding at the end of 2025, so businesses should carefully review the loan agreement terms if they are concerned about this timeline, assuming that commercial terms and rates at that time will apply.
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25% Loan Forgiveness: Businesses that repay 75% of their outstanding balance by the end of 2022 will have the remaining 25% of their loan balance forgiven. This is the most beneficial aspect of the CEBA program. For each business that borrowed through the CEBA line of credit this year, the government will look at the amount outstanding on January 1, 2021, which is the calculation date for determining the amount of potential loan forgiveness. To qualify for the 25% loan forgiveness, businesses must repay 75% of the amount between January 1, 2021 and December 31, 2022. The maximum amount that will be reduced will be (i) $10,000 or (ii) 25% of the January 1, 2021 balance. To be clear, businesses that have not borrowed the full $40,000 will not be forgiven the $10,000, it will be a lower forgiven amount equal to 25% of their January 1, 2021 total.
The repayment period for loan forgiveness eligibility is the end of 2022. If 75% of the loan amount is outstanding by December 31, 2022, the business would not be eligible for any forgiveness under the rules as we know them now. The details regarding forgiveness eligibility appear rather binary at this point; if 75% is outstanding by the end of 2022, there appears to be no chance of forgiveness, meaning full principal and interest payments will be required by the end of 2025, and forgiveness is missed Opportunity.
Given the interest-free period and the switch from revolving to non-revolving at the end of the year, we expect many businesses to plan to maximize their borrowings by 31 December 2020 and plan to wait to repay 75% as close as reasonably possible to 2022 December 31, and not earlier.
We encourage you to stay tuned for details on this, which may change after the writing of this article. Business owners should review and note the exact terms when applying and agreeing in case the details change or become more nuanced from time to time.
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Prepare to apply online: The CEBA application will be offered online only. Officers or directors of the company should plan to register and apply online. This person must be someone who can provide legal certification to the business and has the authority to bind the business. It may be prudent to ensure that your directors and officers files are up to date, in case government officials cross-reference company profiles made public through provincial departments. This person will bind the company to comply with the CEBA line of credit agreement. At a minimum, make sure the correct directors and officers are authorized by your bank beforehand.
The Government of Canada recommends that you require a summary of your 2019 T4 pay statement when you apply. Ask your accountant or contact the CRA if you need a reissue.
Funding flow: The concept behind CEBA is that the Government of Canada provides federally guaranteed, interest-free working capital loans to small businesses, but will release the funds through banks. Your bank does a good job of verifying your business information and helping prevent fraud. The Government of Canada is providing CEBA funding to banks so they can provide critical working capital to the businesses they know in every community during the crisis. Without the CEBA program, applying to banks for new lines of credit or loan facilities would have been time-consuming and futile for many businesses during this period of major revenue pause.
By guaranteeing the loans and expediting the application-to-approval timeline, the Government of Canada expedites the process and assumes the risk of default in order to give as many businesses as possible reasonable access to CEBA funding. The federal guarantee for each of these new credit facilities is a key element — something that most private companies in Canada have never had access to.
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Once approved, the funds provided to your business will be deployed through your business’ primary bank. If you have accounts with more than one bank, you should immediately identify your primary bank to use with CEBA. All banks are now advising CEBA applicant customers to make up-to-date online banking arrangements.
The Canadian government also announced it will launch next week the Small and Medium Business Loan and Guarantee Program, which will provide more loans to businesses that need more than $40,000 to survive. These are business lending facilities that will be backed by EDCs and BDCs. Further details of the program’s substreams are released daily online through the Government of Canada, EDC and BDC websites, as well as publications by major banks citing the SME Loan and Guarantee Program.
The SME Loan and Guarantee Scheme is designed to help large SMEs maintain liquidity during the crisis. If your business is interested in these programs, all indications at this point are that you should work through your primary bank, but you can also work through your BDC if you are currently working with an EDC or BDC or looking for new leads and/or EDC on behalf of the customer of BDC who obtained the information. If going through your primary bank, your bank will enter initial information back and forth and will contact the BDC and/or EDC to coordinate eligibility and amounts. These facilities are premised on income returns. They are interest-bearing, have a longer potential repayment period, and do not include an element of loan forgiveness (under current rules). We’ve heard from local banks that if you need a new primary bank to sort things out, they also take on new clients for that purpose.
BDC Syndication Loan Program. Through this substream, the Business Development Bank of Canada (BDC) will provide a guarantee to the business’ primary bank to co-provide term loans to the business to meet operating cash flow needs. BDC will bear 80% of the risk. The bank will assess, underwrite, approve and finance eligible SMEs. The loan charges interest only for the first 12 months, with principal repayments beginning after the first anniversary. After the first year, the loan will assume
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