Private lenders offer loans to repay pandemic loans

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Private lenders offer loans to repay pandemic loans

Some private lenders are offering to refinance small businesses' governments-backed pandemic loans while Ottawa's first repayment deadline looms, contending that higher interest rates will offset the partial loan forgiveness businesses receive if they pay on time.

At this point, only about a fifth of CEBA loans have been paid back, leaving $40 billion in credit outstanding.

The first repayment deadline is Dec. 31. Businesses that pay back the loans before then will have either $10,000 or $20,000 forgiven, depending on the size of the loan. No amounts will be forgiven as of Jan. 1, and interest will start to accrue at 5 percent per year. Some banks are offering a new loan to settle their debts for businesses that don't have enough cash to pay off the loan, but some lenders are offering another option: taking out a new loan to settle their CEBA accounts. The new credit will be at a higher interest rate than Ottawa's but on a lower principal amount, which the lenders argue will save the businesses money.

Repaying pandemic loans adds to small businesses' struggle - one in five will shutter.

The terms of the loan will be differed based on factors such as whether a business can secure the loan with real estate, vehicles or equipment, Labrèche said. He said his company is offering this product in part because of the demand from accountants who work with small businesses.

Refinancing could make sense for companies that can negotiate favourable terms, said Dan Kelly, president of the Canadian Federation of Independent Businesses. He added that some business owners could be taken advantage of.

Meridian Credit Union, one of the biggest institutions to offer a CEBA refinancing program, is Ontario's Meridian Credit Union, the second-largest credit union in Canada. It is charged a one-time $2000 fee and offers a three-year loan with an interest rate of prime plus 1.25 percent, which would currently be 8.2 per cent.

Meridian's vice-president of business banking, Liz Blazanovic, said the program allows their small-business clients to conserve their funds. ''T have to choose between benefiting from the CEBA program's loan forgiveness offer or not being able to meet their cash obligations,'' she said.

Small businesses were easily able to participate in the CEBA program. It was good for those who were in critical need of funds in 2020 but also means that some credit was extended to businesses that didn't otherwise get a loan from a bank.

Merchant Growth, a financial tech firm based in Vancouver, offers assistance to small businesses that can't get credit from conventional financial institutions. It recently launched a CEBA ReFi program that enables business owners to quickly pay off their $40,000 CEBA loans at a total cost of $44,000 to $48,000, paid over 12 to 24 months.

The chief revenue officer for fintech, Kevin Clark, said he is expecting a lot of demand from business owners. We have prepared ourselves to manage significant scale, he said.

The Canadian Bankers Association said it could not speak to any specific programs its members may offer, but said it encourages small-business clients to discuss their options with their banks.

CFIB, which lobbies on behalf of 95,000 small- and medium-sized businesses, is pushing Ottawa to extend the repayment deadline, which it has done once before. The office of federal Finance Minister Chrystia Freeland declined to say if it is considering another extension.

Ufuk Akcigit, an economist at the University of Chicago who monitors Canadian small businesses through his work on QuickBooks' Small Business Index, said extending the deadline further for some struggling business owners could be good for the economy. But extending the deadline for ever is not a solution either, as the government needs to be repaid, he said.

He added that economic literature suggests private lenders are more efficient at screening entrepreneurs, so there might be a benefit to CEBA refinancing programs that - in essence - move public loans into the private market. Although interest rates remain high, it could be challenging for business owners.

Professor Akcigit, a professor of civil engineering at the University of Toronto, said.