Can Your Business Afford the CEBA Loan?
The Canadian Government announced the new Canada Emergency Business Account (CEBA) program that helps small businesses with optional interest-free loans of up to $40,000. Additionally, if you pay it back by December 31, 2022 you will be forgiven up to 25% of the value of the loan (up to $10,000). These guaranteed and government funded loans are intended to help you pay for operational costs that cannot be deferred. Business finance is complicated so strategize and ensure you need it first.
Bottom Line or Top Line?
There is no doubt the government’s assistance is welcomed, and will greatly help many businesses survive, but is it for everyone? Many small businesses are struggling to cover the various expenses that will enable them to make it through the COVID-19 economic disaster. Sales are down significantly, and it could be slow for many months to come. I obviously cannot outline all the good and bad scenarios, but as a small and medium sized business supporter, I do not wish to see businesses dragged down by oversized debt loads.
If your business already has an existing debt load, remember that this is not free money. Borrowing $40,000 sounds attractive when all you must do is simply pay back $30,000 over two years from your bottom line. This is where reverse thinking needs to come into play so you can focus on your top line. Let me explain the top line with a simplified (no interest) example. If your overall small business profit margin is 15% and you borrowed the full $40,000, you are going to have to generate an additional $200,000 on top of your regular sales to make the $30,000 back. The big question is, we are not currently in a regular sales cycle and forecasted sales cannot be assumed or depended on, so how can we even apply this math?
The First Question
One question that businesses need to ask is “can we afford to take a loan in the first place?”. The loan might cover some fixed costs, but you might be making less revenue. If the business is closed for many months, it most likely will not be able to recover the revenue that was lost. The focus should be on the business’ ability to repay the loan after operating at a loss. Regardless of your good intentions, paying back the loan could easily transition into a longer term than strategized. Plan for the unexpected and thoroughly understand your financial health so your business can remain flexible as customers gradually return.
Small Business Matters
There are many positive aspects I could write about, but my intent is to remind businesses to make sure they carefully think before they proceed forward. According to Statistics Canada (Dec 2017) there are a total of 1,152,769 small businesses with 1−99 employees in Canada. Businesses with 1−9 employees make up 73.4 percent. In other words, almost 3 out of 4 Canadian businesses have 1−9 employees. (www.ic.gc.ca) Take the time to ensure your business actually requires this financial assistance as it will directly affect your future abilities. The backbone of Canada's economy is small businesses like yours that, together, support a lot of hard-working Canadians.
Share and Help Others
If I can help you or others with even a small business tip, I will feel rewarded. You can’t do everything yourself so don’t be afraid to ask questions on my Facebook, LinkedIn, or Contact Page. As a consultant, I find a great reward in transferring my knowledge and skills to help others succeed, especially during difficult times. Please "Share" this with others. Vaughn Bonsteel is a Business Consultant and Safety Consultant helping business move forward toward their goals.