COVID Business Help

October 6, 2020

Unfortunately, many small business owners are either getting little or no help from the government.  Ironically, the lockdown has provided plenty of money to poorer people who would, under normal circumstances, be their customers – particularly in the restaurant and entertainment sectors.  The Canada Emergency Benefit Account (“CEBA”) was the government’s go to for small business but it is fraught with challenges.

The CEBA is basically a bank loan for business owners who can meet very specific eligibility criterium.  Many small businesses simply do not or cannot meet the requirements and do not receive any benefits – quite unlike the previously discussed CERB arrangements.  As at this writing nearly 750,000 small businesses have applied for funds.  The eligibility criteria is set out below:

The Borrower is a Canadian operating business in operation as of March 1, 2020.

The Borrower has a federal tax registration.

The Borrower’s total employment income paid in the 2019 calendar year was between Canadian 20,000 and Canadian $1,500,000. For applicants with Canadian $20,000 or less in total employment income paid in the 2019 calendar year:

The Borrower has a Canada Revenue Agency business number and has filed a 2018 or 2019 tax return.

The Borrower has eligible non-deferrable expenses between Canadian $40,000 and Canadian $1,500,000. Eligible non-deferrable expenses could include costs such as rent, property taxes, utilities, and insurance. Expenses will be subject to verification and audit by the Government of Canada.

The Borrower has an active business chequing/operating account with the Lender, which is its primary financial institution. This account was opened on or prior to March 1, 2020 and was not in arrears on existing borrowing facilities, if applicable, with the Lender by 90 days or more as at March 1, 2020.

The Borrower has not previously used the Program and will not apply for support under the Program at any other financial institution.

The Borrower acknowledges its intention to continue to operate its business or to resume operations.

The Borrower agrees to participate in post-funding surveys conducted by the Government of Canada or any of its agents.

How it works is that businesses apply for and receive a $40,000 loan through their own bank.  The deal is that no interest is payable on the loan, with the proviso that the loan is paid in full before December 31, 2022.  And, if it is paid in within that time constraint $10,000 of the loan value is forgiven – but must be recorded as income for the purposes of taxation.  If the loan amount is not paid within the time constraints the full amount, $40,000 less any amounts that may have been paid, is converted to a regular bank loan bearing interest at 5%.

The lockdown has decimated small business across the country and many businesses that have been forced to close will not reopen, leaving the business owner personally on the hook for the $40,000.  Ordinarily it is not wise to take on personally guaranteed business loans during an economic decline, unless there is a great deal of certainty that things will turn around within a reasonable time frame.

There are also specific business related expenses that the loan money must be spent on, so for those thinking they’ll just park it in an interest bearing account for two years then pay the loan off capturing the $10,000 and interest paid as a bonus, it may not be so simple.

Small businesses that have suffered losses at the expense of the lockdown would be well advised to meet with a Licensed Insolvency Trustee to explore more viable options such as the filing of a Division One Proposal.  Let’s compare two scenarios to get a feel for some options.

Case Study:

1.  Business makes widgets, but due to the lockdown many customers have stopped ordering half the staff have been laid off and the business has been maintaining rental payments on a now unused storage facility in addition to the manufacturing plant.  Since manufacturing levels have diminished even that facility is now too expansive for current needs.  The company has a $200,000 operating line that has been maxed out as well as a $50,000 overdraft account and $50,000 worth of credit card facilities in addition to two equipment leases and four vehicle loans.

$40,000 in additional debt means that the company may have breathing room for one month, after all just for the line, the overdraft and credit card $6,000 is required to make minimum monthly payments, then there is the extra rent, lease and loan costs in addition to wages for the skeleton crew that has been kept working.  The extra debt is basically adding insult to injury as the government prepares for even more lockdowns.

2.  Filing a Division One proposal can allow the company to disclaim leases on unneeded rental space, return unwanted equipment and vehicles and substantially reduce the remainder debt to a level that is congruent with realistic cash flow projections under the prevailing circumstances.  A Division One proposal can also be filed jointly with the principal of the company as well as the company itself.  Rather than taking on additional debt with payments deferred on it while other payments must continue to be met – the resourceful and experienced LIT can help the company and its owners find a more viable and reasonable solution, one that is affordable and doable.

For more information call 519-646-2222