Exploring the Real Cost of CEBA Refinancing Alternatives: A Deep Dive into CEBA Loan Repayment

The Canada Emergency Business Account (CEBA) program has been a lifeline for many small and medium-sized businesses (SMBs) during the challenging times brought about by the COVID-19 pandemic. With the potential for up to $20,000 in loan forgiveness, businesses are eager to explore CEBA refinancing options. However, the decision to refinance CEBA loans is not one-size-fits-all. To make an informed choice, business owners must understand the intricacies of cash flow and the total cost of borrowing. This blog delves into the real cost of CEBA refinancing alternatives, offering a comprehensive guide for businesses navigating the path to loan repayment and securing their financial future.

CEBA Repayment Alternatives

CEBA loan repayment presents a pivotal financial decision for businesses across Canada. While the program itself was uniformly available to all Canadian businesses, the best CEBA refinancing options are highly personalized. It is crucial for business owners to weigh the costs and benefits of various repayment strategies to make informed choices tailored to their specific circumstances.

Here, we will explore four primary CEBA repayment alternatives:

Continue with the CEBA loan: This might appear to be the default choice for many borrowers, often referred to as the “do nothing” alternative. However, we will scrutinize the cost implications of this option.

Bank or Credit Union Financing: Businesses with strong credit ratings may qualify for financing from traditional financial institutions, allowing them to take advantage of the government forgiveness while benefiting from relatively low-interest rates.

Alternative Lender Financing: For businesses that do not qualify for bank financing but still possess strong fundamentals, alternative financing options specialize in catering to SMBs. These loans typically come with a factoring rate and shorter terms.

Other Forms of Financing: This category encompasses various creative financing strategies, such as borrowing personally, seeking investments, or combining existing cash with financing.

Assumptions

To ensure a level playing field for evaluating these alternatives, we will make the following assumptions:

The company has a $60,000 CEBA loan.

The company qualifies for $20,000 in loan forgiveness.

The company applies for a refinancing loan from their financial institution before January 18, 2024, effectively moving the repayment deadline to March 28, 2024.

Interest payments are calculated for full months, even if some periods are slightly more or less than a month.

Exploring CEBA Repayment Alternatives

Continue with the CEBA loan:

Loan Amount: $60,000

Interest Rate: 5.0% per annum

Repayment Period: April 2024 to December 2026 (33 months)

Monthly Payment: $250.00 ($60,000 x 5.0% ÷ 12)

Total Cost: $60,000 + ($250 x 33 months) = $68,250

The primary benefit of this option is the low monthly payments of $250.00. However, it’s essential to note that the full principal of $60,000 must be repaid by December 31, 2026.

Bank or Credit Union Financing:

Loan Amount: $40,000 (assuming $20,000 loan forgiveness)

Interest Rate: 15% per annum (illustrative rate)

Repayment Period: April 2024 to December 2026 (33 months)

Monthly Payment: Approximately $1,500 (equal monthly payments)

Total Cost: $40,000 (principal) + $9,061.58 (total interest) = $49,061.58

Bank or credit union financing provides businesses with the benefit of government loan forgiveness on the forgivable portion of the CEBA loan. Although the interest rate may vary based on creditworthiness, this option is typically less costly than continuing with the CEBA loan.

Alternative Lender Financing (24-month term):

Loan Amount: $60,000 (assuming the full CEBA loan)

Factoring Rate: 1.21 (illustrative rate)

Repayment Period: 24 months

Monthly Payment: Approximately $2,400 (factoring rate multiplied by the loan amount)

Total Cost: $60,000 (principal) + $56,800 (total payments) = $116,800

Alternative lenders specialize in SMB financing and offer shorter-term loans. In this example, with a 24-month term, monthly payments are higher, but the total cost is still competitive compared to continuing with the CEBA loan.

Alternative Lender Financing (12-month term):

Loan Amount: $60,000 (assuming the full CEBA loan)

Factoring Rate: 1.21 (illustrative rate)

Repayment Period: 12 months

Monthly Payment: Approximately $4,000 (factoring rate multiplied by the loan amount)

Total Cost: $60,000 (principal) + $48,400 (total payments) = $108,400

Opting for a 12-month term with alternative lender financing results in higher monthly payments but can lead to substantial savings compared to continuing with the CEBA loan.

Exploring Other Financing Options

While the options mentioned above represent discrete alternatives, businesses can also consider combining existing cash with financing or exploring personal borrowing avenues to refinance their CEBA loans. Selling equity in the company is another viable option, albeit one that may require a longer lead time.

Summary of CEBA Refinancing Alternatives

The table below summarizes the monthly payments, total payments, and credit requirements for each CEBA refinancing alternative:

Option Term (months) Monthly Payments Total Payments Credit Needed

Continue with CEBA 33 $250 $68,250 None

Bank or Credit Union Financing 33 $1,500 $49,061.58 Good to Very Good

Alternative Lender Financing 24 $2,400 $116,800 Poor to Good

Alternative Lender Financing 12 $4,000 $108,400 Poor to Good

Conclusion

Navigating CEBA loan repayment is a critical financial decision for businesses seeking to secure their financial future. The real cost of CEBA refinancing alternatives varies based on factors such as creditworthiness, monthly cash flow, and loan terms. It is imperative for business owners to engage with their financial institutions to explore tailored CEBA refinancing options.

While the examples provided in this blog are illustrative, they shed light on the distinctions between CEBA refinancing alternatives and the cost of continuing with the CEBA loan. For businesses that do not qualify for traditional bank financing, alternative lenders offer competitive total cost savings relative to continuing with the CEBA loan.

In summary, CEBA refinancing presents an opportunity for businesses to strategically manage their finances and make the most of government incentives. By making informed decisions and selecting the right CEBA refinancing option, businesses can optimize their financial health and pave the way for a resilient future.

 


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