CEBA debt burden continues to put small businesses at risk

Financial strain could prompt more layoffs and insolvencies

CEBA debt burden continues to put small businesses at risk

Insurance News

By Gia Snape

Small- and medium-sized enterprises (SMEs) with outstanding Canada Emergency Business Account (CEBA) loans face more financial pressure than ever, as inflation and higher interest rates heighten the risk of insolvency for many business owners.

According to an analysis by Desjardins, some 13% of Canadian businesses appear financially vulnerable, including roughly a third of enterprises in the accommodation and food services industries. Sectors with a higher proportion of small businesses (i.e., restaurants, retail, construction, information, and cultural industries) also show higher vulnerability.

A Desjardins economist told Insurance Business that the hurdles of loan repayment could make conditions even more challenging for small businesses. The strain could potentially trigger layoffs and bankruptcies.

“What will likely happen in some of these situations is that outstanding loans will be refinanced with a loan from a financial institution, which will have to be paid back over time at a higher interest rate,” said Marc Desormeaux, principal economist, Canadian economics at Desjardins.

“Repaying these loans will impact balance sheets and cash on hand. We’re predicting that the economy will enter a mild recession in the next few quarters, so it’ll be challenging with demand weaker during that period anyway, and the challenges associated with repayment could make it even more challenging for some small businesses.”

Where do businesses stand with CEBA repayment?

According to Desjardins data, nearly 900,000 businesses were approved for the pandemic-era loans, of which almost 575,000 received an additional expansion, for a total of $49.2 billion in funds approved.

Smaller businesses with five to 19 employees were most likely to have CEBA loans. Take-up was highest in the accommodation and food services sectors (69%), followed by agriculture, forestry and fishing (65%), and arts, entertainment and recreation (61%).

The repayment deadline for CEBA loans was extended twice until a final deadline on January 18, 2024. For a CEBA loan repaid by the deadline, as much as 33% of the amount owing up to $20,000 would be treated as a grant.

According to the federal government, more than a quarter of companies with CEBA loans missed the January 18 deadline to pay back their loans. This means a meaningful share of outstanding loans will likely be rolled into a three-year loan with a 5% interest rate that must be repaid by December 31, 2026.

Among those who did pay back the government in time, an unknown number refinanced their loans with a bank or another lender.

“This has the impact of weakening economic growth during the period where the loan is being repaid because a small business will be devoting a larger share of its profits towards servicing debts as opposed to paying employees or investing in productivity-enhancing technologies, for instance,” said Desormeaux.

Small businesses under pressure – what are the insurance implications?

In November last year, another expert flagged liability risks among Canadian SMEs that could be triggered by the cost-of-living crisis and pressure for CEBA loan repayments.

Rob Page, North American management liability team leader at CFC, said financial strain would have a knock-on impact on the liability of directors. Layoffs could also trigger more legal action against business owners.

“We often find that in periods of economic uncertainty, there’s an increase in the frequency of employment practices liability claims, so that’s a trend area that we’re watching out for,” said Page.

According to a Desjardins’ report, CEBA loan repayments will impact employment.

“Looking ahead, real GDP and employment growth will be lower because of the federal government requiring CEBA loans to be repaid,” said the report. “According to our estimates, there would be nearly 85,000 more Canadians employed at the end of 2026 if the CEBA loans had all been entirely forgiven, albeit at a significant fiscal cost per job.”

However, Desjardins said it expected the near-term fiscal impact of the CEBA loan program to be “minimal, with the federal government pushing much of the downside risk to the budget balance to the end of 2026.”

It also didn’t rule out other outcomes, such as the federal government opting to extend the final repayment deadline or offer loan forgiveness.

“The government has so far been clear that it isn’t exploring [loan forgiveness], at least not in the near term, but we’ll be watching it closely to see if other options emerge,” Desormeaux said.

What are your thoughts on the risks associated with the CEBA loan burden on small businesses? Tell us in the comments.

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