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CEBA Loan Terms – DECODED

November 23, 2020

Don’t get excited about the government giving you $10,000 – it’s far more complicated than that and these $40,000 loans are being foisted on small businesses by the government, through the banks, when they are most vulnerable.  The government chose to lockdown the economy, even though it had clear options that would have been far more practical to deal with the threat of a new flu like virus.  In any event the $10,000, once forgiven, must be calculated as income for the purposes of taxation – so you could be paying back $5,000 of it in taxation.

The information in red italic text is lifted directly from a Scotiabank Canada Emergency CEBA Business Account Credit Agreement.  The standard text is our attempt to decode and interpret the consequences that appear to be associated with these particular sections of the agreement.

What can you use the money for?

Funds from this loan may only be used to pay for operating costs that cannot be deferred, such as payroll, rent, utilities, debt service, insurance, and property tax.  Your CEBA loan cannot be used to fund payments or expenses such as prepayment and/or refinancing of existing indebtedness, payments of dividends, distributions and increases in compensation to your management.

According to this term, the money you borrow must be used for regular operating expenses.  It cannot be used to enrich business owners of members of the management team – that all seems fair enough.  A bit sketchy though is that the CEBA loan, by this term in the agreement, cannot be used to reduce your exposure to other higher interest-bearing debts by allowing you to pay off or pay them down.   So, the funds may not be used to improve your overall financial situation.

Advance

After December 31, 2020 No additional amounts can be drawn and the Credit Limit for the remaining term of the loan will be the amount drawn on the first business day of January 2021.

For operational reasons, if you repay the full principal of your CEBA loan we may need to readvance part of that repayment to ensure you are able to receive the forgiveness portion noted below.  You will not be charged interest due to this readvance.

It seems that you must make the decision to borrow the money before the end of December 2020, after that you will not be able to secure the loan.  Seems there is a little pressure – in a very uncertain time, over which the government has full control (rolling lockdowns) – to borrow the money.  There’s a further comment on this below in the section labelled “Conversion to Term Loan and Renewal”.

Conversion to Term Loan and Renewal

After December 31,2020 if your CEBA Loan is not repaid in full, your outstanding balance will be converted to a term loan with a maturity date of December 31, 2022 (“the Initial Maturity Date”).  If you do not repay your CEBA loan in full by the “Initial Maturity Date”, subject to any amount that is forgiven in accordance with the provision “Forgiveness Option” below, your loan will automatically renew for an additional three years, extending the maturity date to December 31, 2025 (the “Renewal Maturity Date”).  See Repayment below.

Your CEBA Loan must be paid back in full by December 31, 2020 or it will be converted to a term loan.  What trickery is this?  Go back up to the “Advance” section – “for operational reasons” if you do repay the loan by December 31, 2020 the bank may force you to reborrow funds in order to qualify for the loan forgiveness (below).  Even if you have repaid the full amount of the loan by the requisite date you may have more debt forced on you in order to qualify for debt forgiveness?  It may also be the case that the forgiveness portion will be up to 25% of the amount of indebtedness remaining at the conversion date (January 1, 2021). Perhaps they are only readvancing the forgiveness portion?  That’s not terribly clear.

Interest Rate

Until December 31, 2022 you will not be required to pay interest on your CEBA loan.

After December 31, 2022 you will be required to pay interest at the rate of 5% per annum on the outstanding balance of your CEBA loan.  Interest will accrue daily and will be payable and charged to the Funding Account monthly.  If your CEBA loan is converted to a term loan (see above under “Conversion to Term Loan and Renewal”) and you miss a payment, interest will accrue on the interest portion that was not paid.

You do not have to pay interest on your CEBA loan for 24 months, and only need to repay $30,000 of the $40,000 advanced, or, presumably, up to $30,000 in order to qualify for the forgiveness portion.  If you had borrowed $40,000 but repaid $20,000 by December 31, 2020 you would only be required to repay $15,000 of the remainder (interest free) to qualify for the, prorated, $10,000 forgiveness portion.  Is your head spinning yet?  If we assumed that you had to repay the full $30,000 (75%) between December 31, 2020 and December 2022, without interest, your monthly payments would be $1,250 per month.

Pay attention here because if you did not pay the full amount of the loan back by December 31, 2020 your loan “converts to a term loan”.  There is no interest on the term loan “as long as you do not miss a payment”, if you do miss a payment interest will accrue on any missed payment.  The interest rate is 5% but when that is calculated daily the effective rate is almost 8% per annum.  If your loan remains unpaid after December 31, 2022 you automatically forfeit the $10,000 forgiveness portion and will be subject to the effective rate of 8% per annum until December 31, 2025.

Repayment

Your CEBA loan must be repaid in full by no later than December 31, 2025.  Any portion of your CEBA loan that is not repaid by December 31, 2022 will accrue interest and such interest will be payable in accordance with the heading “Interest Rate” above. 

Your CEBA loan, including all accrued interest (if any) will, in the Bank’s sole discretion, become due and payable immediately upon the occurrence of any of the following (each an “Event of Default”):You fail to pay, when due, any payment required under this Agreement.

a. You fail to pay when due any payments required under this agreement.

b. You fail to observe or perform any provision of the terms and conditions of this Agreement or we become aware that any information provided by you to us (including in the Attestation) or to EDC or the Government of Canada through the application process, was untrue at the time it was provided to such party, or ceases to be true.

c. You default under any other agreement or arrangement between you and the Bank, or you cease to be a customer of the Bank (including if we notify you that we are terminating some or all of our relationship)

d. You become insolvent or bankrupt, a receiver is appointed over a significant portion of your assets, you become the subject of liquidation proceedings, or there is a reorganization, compromise, or arrangement in respect of the Borrower.

e. We have reason to suspect that you are engaged in any improper or unlawful conduct.

f. As required by any laws or rules applicable to you or the Bank.

This section needs careful review too.  Now, we’ve already talked about the interest rate, how it applies and the effective rate versus the posted rate.  If you have any default as defined above the bank has the option to call the loan immediately. 

a.  if you miss a payment for any reason – even a day late would allow the bank the option of calling the loan. 

b.  if any of the information you have provided throughout the application process is found to be inaccurate or “untrue” the bank may call the loan. 

c.  if you default in any manner on a credit card, line of credit, loan or overdraft payment or if you decide to leave the bank that advanced the funds or if the bank decides for any reason whatsoever to terminate any account you have with it, it may call the loan. 

d.  fortunately, for now, you cannot contract out of your right to file a bankruptcy or insolvency proceeding as provided for under the Bankruptcy & Insolvency Act. 

e.  if the bank has any reason to suspect you are engaged in “unlawful conduct” – what happens if you get a speeding ticket?  That probably would not be an enforceable provision if you were charged with a misdemeanour, however, the clause is sufficient vague. 

f.  makes little sense on its own, maybe that clause was written right before lunch break?

Forgiveness Option

On December 31, 2022, if you have repaid 75% of the Initial Principal Amount and provided that such repayment was not required due to an “Event of Default”, the remaining portion of your loan will be forgiven.  For greater certainty, the maximum amount of your CEBA loan that can be forgiven is $10,000.

To ensure you benefit from the full forgiveness amount, please ensure that only repay 75% of the initial Principal Amount.

It would be nice to get through the uncertainty of the next two years in a fashion that would allow you to make the repayments without any further business interruptions by the government.  If you are successful and you have not missed a single payment you will only have been required to repay 75% of the amount advanced (a maximum of $30,000).  You will also have the $10,000, less taxes, as a bonus.

It’s ironic that you are probably borrowing this money as a direct result of decisions made by the government, and even more ironic that the government itself has absolute control over whether or not you will be able to repay the loan in accordance with its complicated terms.  If the government decides to continue with their lockdowns they can in effect force you to default.

Division One Proposals, filed under the Bankruptcy & Insolvency Act may be a far better option than taking on water in a leaky boat – especially when the shoreline is being moved by the lender and you are too tired to paddle faster.

Under a Division One Proposal the face value of all your debts may be reduced – depending on your debt load by significantly more than $40,000.   Interest is almost always terminated in Division Proposals.  Get more information, talk to your local Licensed Insolvency Trustee 519-646-2222