As a business owner, you may have taken advantage of the Canada Emergency Business Account (CEBA) to support your business during these challenging times. The government of Canada extended the deadline for repayment for the 25% forgiveness to Dec 31, 2023. If you don’t repay the balance by this date, the loan will be converted to a 5-year term at 5% interest. Of course, in 2023, Canadian businesses might be even worse financially than in 2020, with depleted resources, rising costs and recession looming. As a business, we also need to calculate the opportunity cost of repaying debt as we use capital to make money. If our rate of return is higher than APR, we are better off staying in debt.

Calculating CEBA loan repayment scenarios can be slightly tricky due to up to $20,000 forgiveness, so we looked at 5 scenarios to repay your CEBA loan.

1. Pay-Off by Dec 31, 2023, and get $20,000

This option is easy if your business has enough cash flow and capital. The CEBA loan is interest-free until December 31, 2023, and you can save 25% on the principal amount (up to $20,000) if repaid by that date. If that is the option you are going for, it’s wise to wait till the last moment possible, as the loan is debt free. There is also a chance that the CEBA repayment date will be extended again. While you wait the $40,000 can be earning money for you.

Cons:

• You need to have $40,000 in the bank
• Perhaps the Opportunity of earning $40,000 is higher than $20,000 in debt forgiveness (doubtful!)

2. Convert CEBA to a 5-year term at 5%

If you cannot pay off the loan early, you can make regular payments according to the repayment schedule provided by your financial institution. This will ensure you pay off the loan by the end of the term and avoid default.

Loan Repayment: Assuming a 5-year term and an as simple annual interest rate of 5% after December 31, 2023, you would pay a total of $68,546.90 over the term, including interest. Compared to the $20,000 forgiveness in the first option, you would pay an extra $28,546.90.

Rate of Return: If you invested $40,000 over 5 years, you would need to earn a rate of return higher than 10.64% to make more money than $28,546.90. While it’s hard to find a rate like this in the market, you might be able to generate more than a 10.64% return on capital inside of your business.

Cons:

• End up paying  $28,546.90 more over 5 years

3. Opt for interest-only payments and a lump-sum payment at the end of the term

If you expect a significant cash inflow in the future or your IRR is super high, you can make interest-only payments during the loan term and plan to repay the principal as a lump-sum payment at the end of the term.

Loan Repayment: For a 5-year term and a 5% annual interest rate, you would make 60 interest-only payments of $250 each (5% of $60,000 / 12), totalling $15,000 in interest payments. At the end of the term, you would repay the $60,000 principal, resulting in a total repayment of $75,000. Compared to the $20,000 forgiveness in the first option, you would pay an extra $35,000.

Opting for interest-only payments and a lump-sum payment at the end may be suitable for businesses expecting a large cash inflow. However, consider the interest costs and potential risks involved in delaying the repayment of the principal.

Rate of Return: If you invested $40,000 over 5 years, you would need to earn a rate of return higher than 13.06% to make more money than $35,000.

Cons:

• End up paying $35,000 more over 5 years.

4. Refinance CEBA in time to get $20,000 forgiven.

You can explore refinancing options to replace your CEBA loan with a new loan offering better terms, such as lower interest rates or longer repayment terms. For example, my current business credit line provides a rate of 9.2%.

Loan Repayment: You only need to borrow $40,000 instead of $60,000.  At 9.2% interest over the course of 5 years, you will pay a total of $50,053.33. You will save around $9,947 ( $20,000 – 10,053.33 interest).

When does refinancing CEBA makes sense? As long as your new loan APR is below 17.2%, you will get some benefit from $20,000 forgiveness.

Cons:

• Need to be financially stable enough to receive $40,000 in an extra loan
• Need to provide some lead time to apply for the loan and get approved
• If you get the loan, but CEBA deadlines get extended – you won’t benefit from it.

5. Combination of Refinancing and Own Payments.

Obviously, it’s easier to make monthly payments rather than paying $40,000 at once. If you make some payments, you will put the dent in a principle and won’t have to take such a significant sum refinancing, saving on interest costs. Yet you might be hesitant to make payments since the deadline might be extended. What’s the solution?

Our recommendation would be to consider making payments into savings, investment accounts or short-term GICs. That way, by the end of the year, you will have some money saved (along with interest earned) to pay down CEBA’s debt, and if the deadline gets extended, you can continue making money on your money.

In conclusion, repaying your CEBA loan is an important business decision, and the choice ultimately depends on your unique financial situation and goals. We’ve explored five different repayment strategies, each with its advantages and drawbacks. While option 2, making regular payments according to the repayment schedule, maybe the least financially advantageous in terms of interest payments, it could still be a viable option for businesses with stable cash flow. Remember to weigh the pros and cons of each strategy carefully before making a decision that best suits your business needs.