Small Business and the Flawed Premise of the CEBA Loan

​   In March of 2020 we are all aware of the circumstances which occurred to bring about one of the greatest economic disasters in world history.  This disaster was worldwide but every country took different paths in order to assist their most vulnerable citizens to help them through this crisis.  Here I will concentrate on one part of the flawed assistance system put in place by the government of Canada.

   As stated by the government at the time.  They understood that many small businesses were suffering terribly due to the lockdowns that were requiring them to close or severely restrict their operations.  They, therefore, put into place a series of government assistance programs.  Many of these programs were hastily developed containing many loopholes that were easily exploited legally due to the "requirement" of assisting many people as quickly as possible.  One such program was called the CEBA, an acronym that stands for "Canadian Emergency Business Account".

   Now I would argue that this account was essential to many small businesses but at its outset their were obvious flaws in the development of this program.  Its first iteration had restrictions to applying that made many of the small business owners that needed it ineligible to even apply.  The government quickly realized this and made it more available to all small businesses in the country over time.  For those unaware of the details of the CEBA, it allowed small businesses to receive an interest free loan of, at first $40,000, later expanded to $60,000 to help them survive through the worst of the pandemic.  At the end of the interest free period if the loan was fully repaid $20,000 would be forgiven.

   The companies that applied for these loans generally fit into three categories.  One, were the companies that genuinely needed it.  Their doors would close without it, these were truly the ones it was designed to save.  The second group, most likely at least as large as the first, were companies that didn't really need the money but saw "interest free" and "one third forgiven" and went sure I'll take it.  These companies, in general, either put the money aside or invested it with the intent of paying it back in full when the interest free period expired.  The third group were people who needed it but knew paying it at the end could be difficult so they paid it off gradually over the two year interest free period as long as they could afford it.   

   This leads to the present situation where the true flaws are now revealed.  The interest free period is about to expire.  According to statistics one quarter of these loans have been paid off.  This accounts for most of group three described above.  Both groups one and two have not repaid their loans.  Group two is still sitting on the money unlikely to repay it until the very last day just in case the government should decide to extend it or forgive more.  Group one, in many cases, is yet to fully recover from the financial hardships created by the difficult situation forced upon them by the pandemic.

   This brings us to the biggest flaw in this assistance program.  The terms of the loan state forgiveness of $20,000 is only given to those who can afford to pay the money back in time, those that can't have to repay the full $60,000.  The terms of that repayment are stated as follows, the $60,000 must be repaid at 5% interest over 24 months.  The government will guarantee loan so no one has to worry about qualifying.  Can you see the flaw here?

   Essentially any company that really needed the money faces the prospect of having to take a loan of $40,000 at a time when interest rates have tripled and the banks are more cautious of lending than ever.  If a company can't afford to get a $40,000 loan, with payments of say, $1,200 per month over 4 or 5 years, they will instead have to make payments of $2,750 a month over 2 years.  This constitutes a death sentence.  The government has left themselves in the position where they must change the repayment terms or risk bankrupting thousands of small businesses country wide.  However, they can't or won't change those terms until they manage to get most of the companies that have the funds to repay them.

   The result is a stressful situation created for the ones it was truly designed to help.  They can only wait for a solution to be proposed that actually saves them or they  lose everything.  The government is holding out to the last minute to announce what they are going to do, leading to many sleepless nights and stress filled moments for the most vulnerable that were forced to trust them in a situation that was beyond their control.          

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