The Government of Canada foreshadowed earlier in March it would be making available $25 billion to businesses across the country affected by the COVID-19 pandemic through an umbrella Business Credit Availability Program (BCAP). Last week we learned more about the main funding envelopes and pathways within the BCAP for businesses to apply for money urgently.
As part of the BCAP suite of financial assistance programs for businesses now being rolled out by the Government of Canada, the following two main streams of emergency business loans are to be opened this week:
- Canada Emergency Business Account (“CEBA”); and
- Small & Medium Sized Enterprise (“SME”) Loan and Guarantee Program.
We describe each below, and at the end of this update touch on some other financial relief tools which may be available for your business.
We are working with all commercial bankers and accountants in our region to ensure ongoing communications and an efficient and practical approach to helping clients access these funds.
Please note: We did not want to delay publication of this update, but we are aware from discussions with bankers at the time of publishing this that application details are still in process. As of Monday morning April 6th, 2020, the online application portal(s) for these facilities are not yet available. Banks are waiting for clarification as to how online applications will be handled through a portal from the bank’s website integrated with application requirements established by the Government of Canada. It is most likely that applications will be through your primary bank’s website in order for know-your-client and any other regulatory requirements to be met regarding authenticity and authority. At this time, it is hoped that such portal(s) will be opened this week. All banks are recommending that interested clients have online banking arrangements and accounts in order and subscribe for their electronic updates.
1. CANADA EMERGENCY BUSINESS ACCOUNT (CEBA): UP TO $40,000 LINE OF CREDIT
This is the stream we expect many businesses in our region will access first.
Eligible businesses may borrow up to $40,000 through the CEBA mechanism. The CEBA is a federally funded revolving line of credit being made available to each eligible business which applies online. The CEBA online application portal(s) are expected to be operational the week of April 6, 2020. Expect publications from all the banks once the CEBA portal(s) open for applications.
Eligibility: CEBA funds will be available for businesses which paid an annual payroll of $50,000 to $1,000,000 in 2019. At this time publicly available information suggests the intent of the funds is to cover non-deferrable costs such as payroll, rent, insurance, and utilities.
Revolving loan, then 5 year term loan: The CEBA will be a federally funded revolving line of credit until December 31, 2020. At the end of this calendar year it will be converted into a 5 year term loan, coming due at the end of 2025.
Interest Free Period, then 5% Interest: No interest will be payable in 2020, 2021, or 2022. Interest will begin to apply on any outstanding balance at an annual rate of 5%, payable monthly, starting January 1, 2023 for the remaining three year term until the end of 2025.
Repayment Deadline: The outstanding balance and applicable interest will mature and become payable in full at the end of 2025. No comment or concession has been made at this time regarding amounts unpaid at the end of 2025, so businesses should review the loan agreement terms carefully if they are concerned about this timeline, and assume commercial terms and rates at the time will apply.
25% Loan Forgiveness: Businesses who repay 75% of the outstanding balance on or prior to the end of 2022 will have the remaining 25% balance of their loan forgiven. This is the most advantageous aspect of the CEBA program. For each business which borrows on their CEBA line of credit this year, the Government will look at the amount outstanding on January 1, 2021, which is the calculation date for purposes of determining the amount of potential loan forgiveness. In order to qualify for 25% loan forgiveness, the business must repay 75% of the January 1, 2021 amount between then and December 31, 2022. The maximum amount which will be forgiven will be the greater of (i) $10,000 or (ii) 25% of the balance on January 1, 2021. To be clear, businesses which don’t borrow the full $40,000 will not have $10,000 forgiven, it will be a lower forgiveness amount equal to 25% of their January 1, 2021 total.
The repayment deadline for loan forgiveness eligibility is end of 2022. If 75% of the amount borrowed is not repaid before December 31, 2022, the business will not be eligible for any forgiveness according to the rules as we know them now. Details around forgiveness eligibility appear quite binary at this time; if 75% is not repaid prior to end of 2022 there appears to be no opportunity for forgiveness, meaning that the entire principal and interest amount will be required to be paid prior to end of 2025 and the opportunity for forgiveness missed.
Given the interest free period and the conversion from a revolving line to a non-revolving loan at the end of this year, we expect many businesses will plan to maximize the borrowed amount by December 31, 2020 and plan to wait to repay 75% as close as reasonably possible to December 31, 2022 and not earlier.
We recommend you continue to monitor details in this regard, which may change after this article is written. Business owners should review and be mindful of the exact terms at the time of applying and agreeing in case details change between now and then or are more nuanced.
Preparing to apply online: CEBA applications will only be available online. Kingston area banks have confirmed they are awaiting online application portal specifics (see opening comment above). An officer or director of the company should plan to enroll and apply online. This must be a person able to make legal attestations for the business and authorized to bind the business. It may be prudent to ensure your directors and officers filings are up to date in case government officials cross-reference corporate profiles publicly available through the provincial Ministry. This person will be binding the company to the CEBA line of credit agreement. At a minimum, ensure the correct director(s) and officer(s) are authorized with your bank in advance.
The Government of Canada is advising that you will need your 2019 T4 Summary of Remuneration Paid statement at the time of application. Speak with your accountant or contact CRA if you require this to be re-issued.
Flow of Funds: The notional concept behind the CEBA is that the Government of Canada is providing federally guaranteed interest-free working capital loans to small businesses, but will release the funds through the banks. Your bank is well positioned to verify your business information and help guard against fraud. The Government of Canada is making CEBA funds available to the banks so that the banks can provide the businesses they know in each community with critical access to working capital during the crisis. Without the CEBA program, applying for new line of credit or loan facilities from the bank would have been time-consuming and futile for many businesses during this period of major revenue suspension.
By guaranteeing the loans and accelerating the application-to-approval timeline, the Government of Canada has fast-tracked the process and assumed default risk in the interest of allowing as many businesses as reasonably possible to receive CEBA funds. The federal guarantee of each of these new credit facilities is the critical element – something that has never been available to most private companies in Canada.
Once approved, the funds being made available to your business will be deployed through your business’s primary bank. If you have an account at more than one bank, you should determine your primary bank for purposes of CEBA right away. All banks are now recommending CEBA applicant clients have online banking arrangements in place and up to date.
2. SME LOAN & GUARANTEE PROGRAM: UP TO $6,250,000 LOAN
The Government of Canada has also announced the SME Loan & Guarantee Program being rolled out this week, which will make larger loans available to businesses who need much more than $40,000 to survive. These are the business loan facilities which will be backstopped by EDC and BDC. More details of the sub-streams of this program are coming online daily through the Government of Canada, EDC, and BDC websites, as well as publications from the major banks referencing the SME Loan & Guarantee Program. This is distinct from the CEBA facilities discussed above.
The SME Loan & Guarantee Program is designed to help larger SMEs maintain liquidity during this crisis period. If your business is interested in these programs, every indication at this time is that you should work through your primary bank, although information is also available through your BDC and/or EDC representatives if you are currently working with EDC or BDC or for new potential clients of BDC. If proceeding through your primary bank, your bank will field initial information back and forth and will contact BDC and/or EDC to coordinate eligibility and amounts. These facilities are premised on a return to revenue. They are interest-bearing, have longer potential repayment terms, and do not include an element of loan forgiveness (according to current rules). We are hearing from the local banks that they are also taking new clients for this purpose if you need a new primary bank to work through.
The SME Loan & Guarantee Program has two sub-steams as follows:
BDC Co-Lending Program. Through this sub-stream the Business Development Bank of Canada (BDC) will provide a guarantee to the business’s primary bank to co-lend a term loan to the business for operational cash flow requirements. BDC will assume 80% of the risk. The bank will assess, underwrite, approve, and fund the qualifying SME. The loan will be interest only for the first 12 months, with principal repayments starting after the first anniversary. After year one the loan will bear interest at a commercial rate. The loan will be subject to a 10 year repayment period. The amount made available will depend on cashflow requirements and revenue forecasts, up to a maximum of $6,250,000 per SME. Application details are evolving, so it is best to contact your primary bank, which will be the first stop to apply for these funds. BDC is administering this in tandem with the leading financial institutions, and is self-described as a shock-absorber for entrepreneurs during this cash crisis similar to the role it assumed during the 2008-2009 financial crisis and at times when drastic commodity price drops have put negative pressure on cash and supply chains.
EDC Guarantee: Through this sub-stream, Export Development Canada (EDC) will provide a guarantee to the business’s primary bank so that the bank can issue a new operating credit and cash flow term loan, up to a maximum of $6,250,000 per SME. The loan will be 80% guaranteed by EDC and must be repaid within one year. The SME must be Canadian based, the funding must be used to sustain operations, and must be net new funding. Application details are evolving, so it is best to contact your primary bank, which will be the first stop to apply for these funds. A company does not need to be a material exporter to qualify or work with EDC for this purpose during this current crisis. This funding sub-steam is available for domestic-oriented companies as well as exporters. This represents a temporary expanded role for EDC during the crisis, through enabling legislation, which now provides EDC with a broader mandate and scope to provide emergency liquidity for various sized Canadian companies.
OTHER PROGRAMS AND RELIEF
Bank Payment Deferrals and Flexibility:
Local bankers from the major financial institutions have been in touch with our office and are reaching out to clients and working on customized credit relief or credit availability arrangements with many clients. Many are offering payment deferral arrangements, interest-only payment periods for business loans secured by a collateral mortgage, credit card payment deferrals, and reduced interest rates, each at the discretion of the bank and generally being assessed at the relationship manager level. For small businesses who may not have an assigned relationship manager, some deferral options are available through online banking buttons. All local banks and branches have indicated they are open for business and making key people available to assist existing and potential new clients navigate available facilities and options.
Canada Emergency Wage Subsidy (CEWS):
Please see recent article here.
Farm Credit Canada:
The Government of Canada has also funded Farm Credit Canada (FCC) an immediate additional $5 billion to facilitate fast-tracked relaxed lending to farmers, and other agribusinesses and food processors to cover cashflow deficiencies. FCC’s priority attention for such funds is ensuring producers are able to plant and meet other critical seasonal needs in light of the current amplified cash crisis for many. FCC is coordinating with the credit unions and banks for many agricultural and food industry clients with overlap. With respect to its direct facilities, FCC is offering existing loan principal and interest payment deferrals and access to additional two year credit lines up to $500,000, with a general security package, amount to be determined on a client by client basis. FCC is not directly offering interest-free loans or loan forgiveness at this time, but is offering a competitive interest rate on a new two year line of credit, with no fees to apply.
BDC led early efforts in making new and more flexible working capital loans of up to $2,000,000 available to businesses, even prior to announcement of the CEBA, and SME Loan & Guarantee Program announced last week by the Government of Canada. In addition to the SME Loan & Guarantee Program, BDC is lending working capital to eligible businesses, with an opportunity to postpone principal and interest payments on new facilities, and opportunities to postpone principal payments on existing facilities. Certain new facilities have reduced interest rates, and contain interest-only periods on term loans weighted for a balloon payment nearer the end, with application fees waived. Business and personal financial information is required and certain financial review and scrutiny will be required. We have details regarding the application process, criteria, and the security package requirements for business interesting in exploring this and being put in touch with BDC.
Tax & Duties Deferrals:
The Government of Canada has also offered HST deferrals, customs duties deferrals, and income tax payment deferrals, you may discuss with your accountant.
We appreciate these are stressful times for many businesses, with cash pressures competing with human and compassionate considerations. If you need help there are many advisors in our community, including accountants and bank representatives, also working remotely with us to also help navigate these new programs and rules. Whether we need to speak directly or not, you are top of mind and we are all working to help ensure our business owners have access to the information and resources needed to make the best decisions possible in the weeks and months ahead.
Partner, Business Law Group
If you have any questions please do not hesitate any member of our Business Law Group below.