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Monday, September 25, 2023

What Happens If You Don’t Repay Your CEBA Loan?

In response to the economic repercussions brought about by the COVID-19 pandemic, the Government of Canada initiated the Canadian Emergency Business Account (CEBA) program to extend financial aid to businesses in need. The CEBA program allows eligible businesses to access interest-free loans of up to $60,000, which are designed to assist in covering operational expenses during a period of reduced revenues. A notable feature of the CEBA loan is its forgiveness provision: if 75% of the loan is repaid by December 31, 2022, the remaining 25% (up to $20,000) is eligible for forgiveness.

Now, what are the implications if you fail to repay your CEBA Loan? Let’s delve into this matter.

The Canadian Emergency Business Account (CEBA) has emerged as a lifeline for numerous Canadian businesses grappling with the economic consequences of the COVID-19 pandemic. A collective total of 898,271 businesses accessed loans worth $49.2 billion through these interest-free arrangements, which acted as a buffer against the economic pressures brought on by the pandemic. The repayment terms are compelling. For borrowers who secured $40,000 or less, a repayment resulting in a remaining balance by the stipulated deadline will lead to the forgiveness of 25% of the loan. For those who borrowed more than $40,000, this translates to 25% forgiveness on the initial $40,000 and an additional 50% on any excess amount.

This support has been pivotal, enabling businesses to sustain their operations, retain their workforce, and adapt their strategies in response to the pandemic. Nevertheless, the journey to recovery from the pandemic has proven to be more prolonged and intricate than initially anticipated. Consequently, some business proprietors are encountering challenges in meeting the repayment deadline and are now pondering the repercussions of failing to repay their CEBA loan.

Repayment terms for CEBA loans

As per the terms, repaying the remaining loan balance on or before December 31, 2023, culminates in the forgiveness of 33 percent of the loan (up to $20,000). The remaining sum is expected to be repaid by December 31, 2025. It’s imperative to recognize that while the loan remains interest-free until 2023, interest at a rate of 5% per annum will be applicable starting from January 1, 2024.

What unfolds if you miss the early payment deadline?

Failure to meet the early repayment deadline of December 31, 2023 results in forfeiting the loan forgiveness benefit. The entire loan amount of $60,000 becomes due by December 31, 2025. This situation introduces a substantial financial burden, which contradicts the original intent of the program to provide relief and foster business continuity.

For instance, a retail business owner from Toronto shared her account of repaying her CEBA loan. She recounted, “We ensured that our loan was repaid by the 2022 deadline. The forgiven portion of the loan supported us in reinvesting in our business and executing a more effective pivot to online sales.” This narrative underscores the significance of meeting the early repayment deadline.

What happens if you miss the final payment deadline?

If you fail to repay the CEBA loan by the final deadline of December 31, 2025, you will default on the loan, prompting the Canada Revenue Agency (CRA) to initiate collections. The extent of the CRA’s assertiveness in their collection efforts remains uncertain. Being aware that you’ve been consistently paying monthly interest, although unable to clear the principal, might provide leeway for negotiating a favorable repayment plan. However, it might be prudent to explore alternative lending options before December 31, 2025, to avoid defaulting on the loan and the associated consequences on credit scores and collection procedures.

Does non-payment of your CEBA loan impact credit or potentially lead to bankruptcy?

Understanding that failing to repay your CEBA loan could bear significant ramifications for your business is paramount. Non-payment is likely to influence your credit rating, making it more arduous to secure loans in the future. In severe scenarios, it might culminate in bankruptcy.

According to a financial advisor based in Montreal, “CEBA loans, like any other loans, come with inherent risks. Non-payment can have repercussions on your business’s credit rating and, in extreme cases, can trigger insolvency or bankruptcy proceedings.” He advises his clients to treat the CEBA loan on par with any other debt and meticulously plan for its repayment.

In conclusion, while the CEBA loan has supplied indispensable support to businesses during the pandemic, it’s of utmost importance to approach its repayment with seriousness. Failing to meet the repayment deadlines can result in the loss of loan forgiveness, accumulation of additional interest, and potential harm to your credit rating.

However, the outlook is not entirely bleak. Strategies and resources are available to adeptly manage your CEBA loan repayment. Consult a financial advisor, construct a contingency plan, and consider the following strategies:

Repay by December 31, 2023, to secure $20,000 in forgiveness for a $60,000 loan. If your business enjoys robust cash flow and capital, contemplate repaying the CEBA loan by December 31, 2023, to capitalize on the government’s forgiveness on the principal sum.

Opt for a 2-year term at 5% interest. If early repayment isn’t feasible, adhering to the repayment schedule outlined by your financial institution can help you avoid default. However, this approach entails paying an additional $26,000 on a $60,000 CEBA loan compared to the forgiveness option.

Refinance the loan in time to secure $20,000 in forgiveness. Explore refinancing avenues to substitute your CEBA loan with a new loan offering superior terms, such as reduced interest rates or extended repayment timelines. This way, you can still avail the $20,000 forgiveness.

Combine Refinancing with Personal Payments. You can consider making regular monthly payments while also exploring refinancing options. As a contingency, contemplate directing payments into savings, investment accounts, or short-term GICs. This approach allows you to save for CEBA debt repayment while potentially accruing interest on your funds. If the deadline experiences an extension, you can continue earning returns on your investment.

In closing, the CEBA loan has fulfilled an essential role in supporting businesses during the pandemic, underscoring the necessity of handling its repayment prudently. Your financial strategy hinges on your unique circumstances and needs, making it prudent to consult a financial advisor to chart the optimal course of action.

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