CEBA loan forgiveness - what is it? How do I qualify?
Is your business one of the nearly 900,000 SMEs that took out a CEBA loan? If so, you could save up to $20,000 if you repay or refinance by January 18, 2024. Read on to see how Swoop can help you save big.
The Canada Emergency Business Account (CEBA)
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The Canada Emergency Business Account (CEBA) was set up to help small businesses and not-for-profits get through the pandemic. Qualified applicants received interest-free loans of up to $40,000 and were subsequently able to apply for a CEBA expansion, which increased the maximum loan amount to $60,000. Eligible CEBA borrowers in good standing who repay or apply to refinance their loan by January 18, 2024 can receive loan forgiveness of up to $20,000. Even if you weren’t planning to repay your balance before the deadline, there might be a business financing strategy that will make it possible to claim the forgivable portion of your CEBA loan. Keep reading for details.
What is a CEBA loan?
The CEBA program offered interest-free loans of up to $60,000 to Canadian small businesses and not-for-profits. It was open for applications from April 9, 2020 to June 30, 2021, and nearly $50 billion was lent to almost 900,000 applicants. CEBA was made available through more than 220 banks, credit unions and other financial institutions across the country.
The original CEBA loan repayment deadline was December 31, 2022, but this was moved back 12 months to December 31, 2023 and has been moved again to January 18, 2024 (for eligible businesses). If a CEBA loan remains outstanding after January 18, 2024, interest payments will be required at a rate of 5% per annum until December 31, 2026, when the full principal repayment will be due.
Important: If you have not been contacted by your lender to notify you of partial loan forgiveness, your loan repayment deadline is still December 31, 2023.
New grace period for refinancing: A grace period has been added for those who need extra time to finalize the payout of their CEBA loan. If CEBA loan holders submit a refinancing loan application to the financial institution that provided their CEBA loan by January 18, 2024, they can still qualify for partial loan forgiveness if the outstanding principal of their CEBA loan, other than the amount of potential debt forgiveness, plus any applicable interest is repaid by March 28, 2024.
What is CEBA loan forgiveness?
CEBA loan forgiveness makes up to $20,000 of the loan amount forgivable if certain conditions are met. These conditions include the loan being in good standing (i.e. not in default) and the outstanding principal (minus the potential debt forgiveness) being repaid by January 18, 2024, or by March 28, 2024 (plus any applicable interest) if an application for loan financing has been filed with the financial institution that provided the CEBA loan by January 18, 2024.
The forgivable portion is calculated as follows:
If you borrowed $40,000 you can receive loan forgiveness of 25%. That means you must repay at least 75% of the outstanding principal by January 18, 2024. in order to receive loan forgiveness. For example:
|If you borrowed
|You must repay
|To be forgiven
If you borrowed between $40,000 and $60,000, you can receive loan forgiveness of 25% of the first $40,000 and 50% of the the next $20,000. For example:
|If you borrowed
|You must repay
|To be forgiven
If you repaid your original $40,000 loan, claimed forgiveness, and later received the $20,000 expansion, the 50% rate applies. That means you can repay $10,000 and be forgiven the remaining $10,000.
Your bank or financial institution can help you determine exactly how much you’ve borrowed, how much you’ve repaid, and how much more you need to repay in order to claim the forgivable portion of your loan.
Important: If you have received a notice from your financial institution saying that your business is not eligible for loan forgiveness, then the January 18,
2024 extension does not apply. Your repayment deadline stays the same, which means you are required to repay your CEBA loan in full by December 31, 2023.
What does it mean to be in ‘good standing’?
A CEBA loan is in good standing if the borrower has met all of the repayment terms set out by their financial institution. In general, this means that all applicable payments of principle, interest and fees have been made in full and on time. If you have any questions about whether your CEBA loan is in good standing, please contact your financial institution directly.
How does it work?
You can think of the CEBA loan forgiveness program as having five phases:
- December 31 2023 – this is the current CEBA loan repayment deadline for businesses who are not eligible for the January 18, 2024 deadline extension (your lender will have notified you of this).
- Before January 18, 2024 – this is the current grace period where the interest rate is 0% and no principal repayment is required. During this period, you can make a sufficient repayment or apply for refinancing and benefit from loan forgiveness (eligible businesses only).
- January 18, 2024 -current CEBA loan repayment deadline (eligible businesses only – again, your lender will have notified you if this is your deadline). Repay the outstanding principal (minus the potential debt forgiveness), or apply for refinance by this date to benefit from the discount.
- January 19, 2024 – if you’ve not applied for refinancing, any remaining balance owing on your CEBA loan will be converted to a 2-year term loan at 5% interest on this date.
- March 28, 2024. This is the final day to repay your loan balance to qualify for loan forgiveness if you applied for refinancing by January 18, 2024.
- December 31, 2026. This is the final deadline to fully repay your CEBA loan
How much of a CEBA loan is forgivable?
The forgivable portion of a CEBA loan is calculated based on two tiers:
- Loans of $40,000. If you borrowed $40,000 and did not receive a CEBA extension, you can have 25% of your loan forgiven ($10,000).
- Loans between $40,000 and $60,000. If you borrowed $40,000 initially and received a subsequent CEBA extension, you can have 25% of the initial loan forgiven and 50% of the extension forgiven (total $20,000).
What are the terms of forgiveness?
You must pay the remaining principal of your CEBA loan minus the forgivable portion by January 18, 2024 in order to receive loan forgiveness. For example, if you borrowed $60,000, the maximum loan forgiveness amount is $20,000. Therefore, you need to repay $40,000 by January 18, 2024 in order to have the remaining $20,000 forgiven.
Note on refinancing: There is a grace period for those who apply for loan financing at the financial institution that provided the original CEBA loan. If the application is filed by January 18, 2024, the CEBA loan can still qualify for partial loan forgiveness if the outstanding principal, other than the amount of potential debt forgiveness, plus any applicable interest is repaid by March 28, 2024.
Here are two example scenarios:
Tom borrowed $40,000 from the CEBA loan program. The maximum loan forgiveness available to him is $10,000 ($40,000 x 25%), which means he needs to repay $30,000 by January 18, 2024 in order to qualify. He has already repaid $10,000 of the outstanding principal, so he is going to pay the remaining $20,000 by the end of the year using cash flow from his business in order to have $10,000 of his loan forgiven.
Suzy borrowed $60,000 from the CEBA program. The maximum loan forgiveness available to her is $20,000 ($40,000 x 25% + $20,000 x 50%), which means she needs to repay $40,000 by January 18, 2024 in order to qualify. Since she doesn’t have the cash flow to make this payment, she has decided to refinance her CEBA loan. She’ll use a $40,000 line of credit to pay off her CEBA loan and secure $20,000 in loan forgiveness.
How do I qualify for forgiveness?
If you met the eligibility criteria to receive a CEBA loan in the first place, remain in good standing today, and repay the outstanding balance of the loan (other than the amount that can be forgiven), or apply for refinancing on or before January 18, 2024, you will qualify for forgiveness.
Please note that CEBA eligibility was determined based on the criteria established by the Government of Canada. No bank, credit union or other organization involved in administering the CEBA program has the authority to grant exceptions to these criteria.
If you have received a notice from your financial institution saying that your business is not eligible for loan forgiveness, then you are still required to repay your CEBA loan in full by December 31, 2023.
What is the CEBA loan forgiveness deadline?
How can I find out the balance of my loan?
CEBA loans are administered by banks and credit unions across Canada, and they can provide details regarding your loan balance, outstanding amount that must be repaid, acceptable methods of repayment, and terms of the loan. Some banks allow you to conveniently check your balance and make payments online.
Is CEBA loan forgiveness taxable?
How do I account for CEBA loan forgiveness?
Your CEBA loan forgiveness amount should be recorded as income. For example, if you originally borrowed $40,000 and repaid $30,000 in order to secure $10,000 of loan forgiveness, you would have $10,000 of taxable income. For specific advice on how to record this transaction, we recommend seeking the advice of a professional accountant.
What happens if I can’t pay back my loan by the Jan 18, 2024 deadline?
If you have failed to comply with any of the repayment terms set out by your financial institution, your CEBA loan may not be in good standing and you may not qualify for loan forgiveness. If this is the case, your bank or credit union will contact you regarding next steps.
If your CEBA loan is in good standing and you do not repay the required amount of your loan by January 18, 2024, you will not receive forgiveness. During the period of January 19, 2024 to December 31, 2026, you will be required to pay interest on your CEBA loan at a rate of 5% per year. If you have questions about the payment terms after January 18, 2024, please contact your financial institution.
If you plan to refinance your CEBA loan, you can apply with the same financial
institution that issued your original loan by January 18, 2024 and unlock a grace period until March 28, 2024 to finalize your financing and qualify for loan forgiveness.
Can I refinance my CEBA loan?
Yes, and this could be an effective strategy for those who do not have the capital on hand to secure the forgivable portion of their loan.
For example, let’s say you borrowed the maximum amount of $60,000 and have not made any payments yet. You could obtain business financing to repay $40,000 before the deadline of January 18, 2024, and have the remaining $20,000 forgiven. Although there would be interest costs associated with the $40,000 loan, this would likely be more than offset by the $20,000 of loan forgiveness. In addition, you will avoid carrying a balance with the CEBA program, which will begin charging interest of 5% annually, paid monthly starting on January 19, 2024.
Speak to a CEBA refinancing expert at Swoop who can guide on your best options
Working capital is calculated by subtracting the total of a company’s liabilities from its total current assets. Current assets include cash, accounts receivable, inventory, and other assets that are expected to be liquidated or turned into cash in less than one year. Current liabilities include accounts payable, wages, taxes payable, and the current portion of long-term debt that’s due within one year. If the result reveals a surplus of assets, that is called positive working capital. If the result reveals more liabilities than assets, that’s called negative working capital.
Company’s total current assets: $200,000
Company’s total current liabilities : $135,000
Positive working capital of $65,000
Working capital efficiency is a measure of how fast a business can convert inventories or available services into sales, compared to how soon it must pay its suppliers for those same inventories or services. This is also known as the cash conversion cycle. The sooner a company can make a sale, compared to the time it must pay for the item or service it is selling, the better its working capital efficiency. Cash that is tied up for too long in warehoused inventory or pre-paid services, reveals poor working capital efficiency. Businesses with good working capital efficiency can usually borrow more easily from lenders and allocate more cash to invest in growth.
Company buys inventory on 60 days credit from suppliers.
It sells the inventory in an average of 30 days from delivery by supplier.
Good working capital efficiency.
Company buys inventory on 60 days credit from suppliers.
It sells the inventory in an average of 90 days from delivery by supplier.
Poor working capital efficiency.
Working capital loans provide cash to fund a company’s day to day operating expenses. They are short-term debt instruments and not used for long-term debt or investments such as the purchase of plant or property. Working capital loans are typically paid back within a year or less and they are useful because many businesses have income that varies throughout the year. This is especially true of businesses that sell seasonal goods or services, where they have brief periods of high sales and prolonged periods when sales are slow. Because many costs, such as wages, rent, utilities, and materials or inventory purchases remain constant, businesses with fluctuating sales cycles often need a working capital loan to cover these expenses during their quieter sales periods.
Working capital loans provide cash to fund a business’s everyday activities and pay for things like wages, rent, utilities, materials, inventory, and ancillary services. Loans can either be secured or unsecured and are usually paid back within one year or less. Secured loans are typically easier to obtain, as the borrower provides collateral to protect the lender from loss. Unsecured loans are obtained without the provision of collateral and are based on the credit score and financial health of the company and sometimes, of the business owner(s).
Canadian working capital loans come in a variety of shapes and sizes and they include term loans, business lines of credit, business credit cards, merchant cash advances, and invoice financing.
- • Term loan: A lump sum that is paid back plus interest in regular instalments over a fixed period. The loan may be secured or unsecured.
- • Business line of credit: This type of borrowing functions like a bank overdraft facility, with the borrower having the freedom to withdraw and pay back borrowed funds from a flexible loan account. Borrowing is subject to maximum credit availability and any minimum payment conditions. May be secured or unsecured.
- • Business credit card: A credit card with a fixed borrowing limit in the name of the business. Usually unsecured, but often comes with higher interest rates and fees.
- • Merchant cash advance: Borrowing against credit card receipts, repaid as a percentage of monthly or weekly card income. Suitable for businesses that get mostly paid by customer
- • Credit or debit card: Card sales provide security to the lender and the higher your card sales turnover, the more you can usually borrow. No additional collateral is usually required.
- • Invoice financing: Also known as account receivable financing. The company sells or borrows against the value of its outstanding accounts receivable (unpaid customer invoices). The invoices provide security to the lender. No additional collateral is usually required.
Working capital loans from $5k all the way to $25m are available, but your borrowing ability will be determined by several factors, such as gross turnover, how long your business has been trading, your business credit score, the type of industry you operate in, what type of borrowing you choose, and if the loan is secured or unsecured. Register with Swoop to discuss your borrowing needs and to determine what type of loan works best for your business.
Interest rates vary according to the type of working capital loan you choose and if it is secured or unsecured. (Secured loans usually come with lower interest rates and fees). Current rates range from 9.9% representative APR for business credit cards, anywhere from 1.8% – 45% with term loans, and as low as 0.6% if you opt for invoice financing.
Working capital loans are used to pay for general business costs. This means they can be used for almost anything to help your business thrive. Typically used during periods when income is reduced but costs remain constant or even elevated, working capital loans can cover wages, rent, taxes, utility costs, repairs, inventory build-up, materials purchases, marketing expenses and more.
Company A are a wholesaler. They sell seasonal goods for the holiday period at the end of the year. From March onwards, they buy finished goods from manufacturers across the globe and during the summer months, they re-sell these goods to large retailers nationwide. Peak sales occur during July to September and they receive payment in November and December. Their busiest period is in the spring and summer when they must make large payments to suppliers for finished goods and their onward shipping to customers.
Because the company’s income is ‘lumpy’, with lengthy periods of cash going out but little coming in, they typically rely on a working capital loan to pay regular expenses and the costs of buying stock during the slow sales period. They do this by withdrawing cash from a business line of credit, using borrowed funds to cover costs until the bulk of their income arrives in the last two months of the year. As they receive payment from their customers, the company repays the line of credit, plus any interest charges and fees. By the time the cycle starts again each March, they have returned the line of credit balance to zero.
Working capital is crucial for business growth, but almost every business goes through periods when available working capital is tight, (but the bills must still be paid). A working capital loan can smooth away the bumps in a company’s cash flow, giving the business the best chance of success.
Key advantages of a working capital loan:
- • Working capital loans can usually be obtained quickly, sometimes in less than 24 hours. This allows business owners to rapidly address short-term financial needs.
- • Most working capital loans are received all at once in a lump sum.
- • Some working capital loans can be obtained without providing collateral.
- • Business owners are not required to give up equity or control in their organisation.
- • Lenders can usually tailor loan payments to the cash flow of the business, which avoids added financial pressure during low-activity periods.
Compared to the upsides, there are few disadvantages to working capital loans:
- • Because they are short-term and often provided with no or low collateral requirements, interest rates are usually higher with working capital loans than other forms of debt financing.
- • For businesses with no or limited history of cash flows, a working capital loan may be tied to the business owner’s personal credit. Missed payments or default could hurt the individual’s credit score.
- • Higher interest rates make short-term working capital loans unsuitable for funding large-scale or investment expenditures.
A term loan is a lump sum of borrowed cash that is paid back with regular payments over a fixed period. Technically, this is a working capital loan. However, because the loan is not flexible, (after receipt of the initial lump sum, the borrower cannot re-borrow the same cash again and again like a line of credit), some lenders and borrowers class term loans differently. Additionally, most working capital loans are short-term, usually repaying in a year or less, whereas term loans can be repaid over much longer periods – anywhere from one to thirty years.
At first glance, working capital loans and bank overdraft facilities would appear to be the same thing – they both provide extra funds when needed. However, many working capital loans have a final repayment date when the borrowed funds must all be repaid – whereas bank overdrafts can usually be refreshed annually and stay in place for years. Additionally, unlike working capital loans that can often be obtained quickly, bank overdrafts are typically slow to set up and can come with punitive penalty charges should the borrower exceed their credit limit. Both types of loan may require the borrower to provide collateral as security.
Cash credit is a bank lending facility that functions like an overdraft – it provides extra funds when the business needs it. However, unlike an overdraft, which is essentially an open agreement between the bank and the customer to let the customer’s bank account run into the negative, cash credit is a separate account – sometimes called a ‘cash reserve account’ – that can provide emergency funds upon demand. (The customer ‘calls’ funds from the cash credit account and they are transferred to the customer current account). Cash credit accounts differ from most other working capital loans because they often require collateral from the borrower, have no fixed repayment date and interest is usually charged daily.
An MBO is a complex transaction and all too often, the buyout team will be too busy pushing the deal through to consider the tax implications of their purchase. It is only later, when they go to cash out from the business that they realise their mistakes.
As of 2021, one of the most important tax issues that pending new UK business owners should consider is Entrepreneur’s Relief. (Known as ER, and now called Business Asset Disposal Relief). This vehicle allows company owners to increase their financial gains when selling all or part of their business. For owners with more than 5% of a company’s shares, it lets them apply a reduced rate of 10% capital gains tax (CGT) on the profits they make when they sell qualifying assets (such as their company shares) up to £1 million. This is half the current CGT rate of 20% once an individual reaches the higher tax band, representing a potential saving of up to £1 million.
Establishing the correct ownership structure at the time of the MBO is essential to capture this valuable saving. There are strict conditions attached to ER, which demand the support of expert tax advisors. ER may disappear in future budgets, but it currently reveals a need to avoid any structure that involves dividend payments, such as the Company Purchase of Own Shares route.
Register with Swoop to discuss your MBO structure before you finalise the purchase with the seller. Your potential tax savings could be significant.
Yes. There are working capital loans for all type of business and with good credit or bad. Even if you’ve been turned down elsewhere, it may still be possible to obtain the financing your business needs to succeed. Register with us to discover more about our working capital loans for businesses with bad credit or even no credit at all.
Yes. There are specialist working capital loans for startups, and an array of borrowing options for small businesses and sole traders. No matter what type of industry you operate in, if you’re just beginning your entrepreneurial journey, or your small business has decades behind it, there’s a working capital loan to suit your needs.
Working capital loans can be obtained with or without providing collateral. Some loan products, such as business credit cards, can usually be obtained unsecured, others, such as merchant cash advances, have security built-in as they are based on the borrower’s customer credit card transactions. Business lines of credit and term loans may or may not require collateral. Your company’s financial history, the amount you wish to borrow and the type of loan you choose will determine if security is required or not.
Unlike long-term asset-purchase loans, such as business mortgages, working capital loans are designed to fund short-term dips in a business’s available cash. As debt, they create a liability on the balance sheet, but as cash they also create an asset on the ledger. Even as the borrowed sum is spent to pay ongoing business activities this equality remains the same – the cash on the asset side of the ledger may be reducing, but so are the debts on the liability side that the cash is paying off. This means working capital loans are neither a true asset, nor a true liability. They are a self-cancelling payment mechanism.
A working capital demand loan is like a bank overdraft or a business line of credit; the company opens a flexible loan account and has the freedom to withdraw and repay funds into the account as required. However, unlike bank overdraft facilities or business lines of credit, which may continually refresh and remain in place for years, a demand loan will have a fixed repayment date when the borrowing must be repaid in full – typically 90 or 180 days. Working capital demand loans can usually be obtained quickly and they may or may not require collateral.
For Paypal business users only. Credit approval, the amount that can be borrowed and the repayment terms are determined by the borrower’s Paypal sales and account history. No other documentation is required. The borrower’s personal credit score is unaffected.
For eBay sellers only. Credit approval, the amount that can be borrowed and the repayment terms are determined by the borrower’s Ebay sales and account history, plus other financial and business information.
The documentation required to obtain a working capital loan will vary according to the amount you wish to borrow and the type of business you operate. Some of the more routinely required documents include:
- • Description of your business and list of key customers/suppliers.
- • Current Balance Sheet and Cashflow projection.
- • Income Statement – historical record of income and expenditures.
- • Bank Statements – most recent 6 to 12 months.
- • Business Tax Returns – last three years if available.
- • Purpose of loan – the amount you are seeking and what the funds will be used for, (such as ‘inventory purchasing’).
The type of loan you are seeking will also have impact on the documentation you must supply – for example, a merchant cash advance will require different paperwork than a business line of credit. Lastly, lenders will conduct a credit check on your business and possibly the business owner(s).
No matter if your business is a startup or an established SME, or if it operates in retail, manufacturing, construction, automotive, farming, transport, or a myriad of other industries, it is almost certainly eligible for a working capital loan. Additionally, organisations with seasonal sales periods or that offer extended credit to their customers are ideally situated for this type of financial support. Register with Swoop to discover what type of working capital loan your business is best qualified for.
If you need immediate cash to buy inventory, pay wages, cover tax bills, make repairs or expand your business, a working capital loan can make the going easier. Get started with one simple application. Give your business the business credit it deserves. Apply now.
Ready to grow your business?