April 3, 2020
Another result of the COVID-19 pandemic is the government’s Business Credit Availability Program (BCAP), a new federally sponsored program for affected businesses, including health care professionals.
Canada Emergency Business Account (CEBA)
Available through most major banks (see links below), this is a loan for up to $40,000 to cover operating costs, payroll costs and other nondeferrable expenses critical to continuing operations during a period when income has been temporarily reduced.
Structured initially as a $40,000 revolving line of credit (meaning it can be drawn against, paid down, drawn on again and so on. Like a credit card!) until December 31, 2020, when it converts to a 5-year, non-revolving term loan (meaning it can no longer be drawn against) which must be repaid in full by December 31, 2025.
The loan is interest free until December 31, 2022 (a particularly important feature when cash is scarce). Beginning January 1, 2023, interest starts to accumulate at 5% annually. But, that should NOT be a problem because if 75% of the balance at January 1, 2021, is paid off by December 31, 2022, the remaining balance will be forgiven. For example, if the balance is $40,000 on January 1, 2021 and $30,000 is repaid by December 31, 2022, the remaining $10,000 will be forgiven. (Yes, you will have to pay income tax on this remaining amount as it represents income.)
Eligibility criteria¹ for this loan includes the following:
- must be a registered operating company in Canada;
- must have an annual payroll of between $50,000 and $1 million, as evidenced from the 2019 T4SUM Summary of Remuneration Paid; and
- must have an operating account with a bank affiliated with this program.
I have had several conversations with clients over the past few days about this program.
CEBA-related webpage links which may be useful include:
Steps to apply for this loan:
- advise your bank representative you’re interested in CEBA and ensure they have your up-to-date email address so they can email you as soon as the loan application becomes available
- ensure you are registered for online banking with your bank – if you aren’t, register now
- if registered, ensure that your information is current and complete
- have your 2019 T4SUM Summary of Remuneration Paid at the ready
- have your 15-digit payroll account number available (business number ending in RP000X on your 2019 T4SUM) available
- prepare and approve a corporate resolution allowing you to apply for the loan – ask your banker for a sample to complete
If you do not have a bank contact but need one, access our Professional Advisors page on our website. Or, ask us for an introduction to be made. COVID-19, a good example of why it is important to have a team of advisors in place that may be reached as needs arise. We regularly remind clients to “build your team” and give advisors permission to communicate and work together on your behalf.
¹Program details and eligibility criteria continue to be developed with the federal government at the time of writing and may be subject to additions or changes.
Business Development Bank of Canada (BDC) – Options to Access Cash
In addition to programs such as CEBA, the federal government is using BDC to make funds available through a variety of loan programs, a couple of which are described below.
Small business loans of up to $100,000 may be applied for online and include the following eligibility criteria:
- applicant has a good credit history;
- applicant has been in business for a minimum of twenty-four months; and
- applicant is a Canadian business.
Loan applications are made online. There are no application fees. Collateral not required (although a personal guarantee is).
Working capital loans for up to $2 million may be applied for through BDC directly. Eligibility criteria is similar to BDC’s small business loan.
For health care professionals, I’m advised that BDC will accept historic financial information rather than current financial results reflective of shut-down conditions as they consider client applications.
Examples of terms offered currently which we have seen in the last week or so:
- loan term: 3 years
- interest-only period: first 12 months
- interest rate (BDC variable rate): 3.3% (5.05% minus 1.75%)
- prepayment penalty: equivalent of 3 months of interest
- principal paydown would occur as follows:
- 40% of the loan balance in Years 2 and 3
- 60% of the loan balance due at end of Year 3 as a balloon payment
Where cash flow is insufficient to repay the balance of this loan at the end of Year 3, an application to refinance this amount for a further term (subject to re-approval) can be made.
The application process will involve a phone call with BDC to review details. A Statement of Personal Affairs document, financing application, cash flow worksheet, three previous years of accountant-prepared financial statements and internally generated year-to-date financial statements are typically requested.
Steps to apply for this loan:
- contact your bank representative to discuss the financial assistance needed
- obtain the necessary forms for completion (e.g. cash flow template, financing application, Statement of Personal Affairs)
- prepare and approve a corporate resolution allowing you to apply for the loan
- complete the Statement of Personal Affairs
- ask your accountant for assistance in completing the cash flow worksheet and financing application (this will be needed in order to determine the amount of money to be borrowed to sustain operations
- contact your accountant and request a secure client portal for your banker and request the following documents be uploaded:
- Last three (3) years of financial statements
- Last three (3) of personal tax returns and Notices of (Re)assessment
- Last three (3) years of Corporation Notices of (Re)assessment
If application is made for a working capital loan, enquire of the costs (application fees, legal fees) involved to put this facility in place. These charges add further costs to this financing option.
A Cautionary Note. A concluding comment about taking on debt to meet existing debts and financial commitments. Obviously, the most urgent concern for many health care professionals experiencing financial challenges currently is to, (1) take advantage of all available government assistance and, (2) put in place credit facilities to sustain practice and personal finances through the coming months. However, debts incurred will need to be repaid. So, exercise caution.
According to many economists, prospects are bleak for the economy as we emerge from COVID-19. So, only borrow if there are no other choices. If a cash flow plan has been submitted as part of a bank application, study it and adhere to it in the months that follow. Take the necessary steps to start to build (or rebuild) available cash and exercise discipline to ensure this happens. Six to nine months of cash should be a minimum amount that is always available should the unexpected occur.
Other Options to Access (or Preserve) Cash
Here are some further suggestions to access (or preserve) cash.
Make written request (an email for future reference will suffice) for payment deferrals, for six months, in writing from the following, as applicable:
- equipment/supply vendors – work out a payment plan for existing balances so that vendors understand you have a plan to repay balances that includes them
- leasing companies with whom existing leases are held
- auto leasing companies or lenders
Where term loans or mortgages (personal and corporate) are involved request a six-month payment deferral. If unsuccessful, request “interest-only” payment terms. (Interest on the principal will continue to accrue on the unpaid balance.)
Not every lender will agree to the requests made, but this is an important exercise. It will be critical as part of determining the amount of financing to be obtained from the bank (or elsewhere).
Once debtors have been engaged and arrangements made, then work with your accountant to determine the cash shortfall now to be addressed. This information is captured as part of the cash flow worksheet which represents the monthly plan for the coming months. Without this, a bank won’t lend and a practice may not survive!
Other Tax-related Sources of Cash
Consider the following as possible sources of cash during this shut-down;
- income tax refunds from unfiled T1 personal tax returns
- income tax refunds from unfiled T2 corporate tax returns (ensure your accountant selects refund code “1” (line 894) for a refund request to be made; otherwise, any refund may be carried forward to the next year!)
- defer GST/HST payments
- defer personal and corporate income tax instalments
- submit loss carryback requests to the CRA to recover personal or corporate income tax paid in previous years
If there are questions arising from this article, contact Jonathan Tucker. Contact information is set out below.
Jonathan’s previous COVID-19 related articles:
Brief Update for Healthcare Professionals (March 18, 2020)
Newly Announced Canada Emergency Response Benefit (CERB) (March 25, 2020)
Now Ontario Implements New Tax Measures of Its Own! (March 27, 2020)
UPDATE: 75% Temporary Wage Subsidy and Health Care Professionals (April 1, 2020)
An Update to Yesterday’s Update! The Canada Emergency Wage Subsidy (April 2, 2020)