COVID-19 and the cost of business relief
By ATB Financial 8 May 2020 6 min read
Since the COVID-19 pandemic has sideswiped businesses in Alberta and across Canada, the federal government has offered various relief programs, loans and subsidies to help companies cope with the fallout.
And with more than three-quarters of Canadian companies worried about business cash flow because of COVID-19, the prospect of generous government loans is particularly appealing.
But between their wordy names and associated acronyms to what might feel like pages of fine print, it can be difficult for business owners to understand what relief program is right for their business.
“Business owners first need to fully understand what position they are in financially and how much money they need,” says Dustin Paisley, Entrepreneur Strategist at ATB. “What they don’t want to do is borrow all this money when it’s just adding water to a sinking ship.”
What follows is a quick breakdown of some of the different business relief programs for Canadian companies, as well as some tips on how to feel confident you’re choosing the right relief for your business.
Financial relief by the numbers
From the steep loss in revenue to having to furlough or lay off employees, the impact of the global lockdown has hurt Canadian companies in extraordinary ways. Consider these statistics:
- When it comes to the impact of COVID-19, more than 75 per cent of businesses are worried about cash flow.
- Thirty-two per cent of businesses report that their revenues from the first quarter of 2020 were down by 40 per cent or more from the same quarter a year earlier.
- Forty-four per cent of surveyed businesses admit they aren’t sure if their business will survive if the current restrictions continue until the end of May.
- Financial analysts estimate Canada’s economy could shrink by up to 35 per cent in the second quarter on an annualized basis.
Canadian business relief programs breakdown
Here’s a list of some of the main federal relief programs available to businesses.
- Business Credit Availability Programs (BCAP): In partnership with the Business Development Bank of Canada (BDC) and Export Development Canada (EDC) these programs provide capacity to your financial institutions so they can lend to your business to cover operational expenses. These programs allow the financial institution to underwrite loans for cash flow purposes by covering 80% of a loan to a maximum amount of $6.25M each. Loans are interest bearing debt and each financial institution has their own guidelines on program use, so best to talk to them directly.
Considerations with respect to BCAP programs: The biggest consideration with these offers is that they are on balance sheet loans underwritten and provided by your financial institution. The coverage provided by BDC and EDC is to allow a Financial Institution to take on additional risk in the face of business need, however, the loans are underwritten and facilitated like a regular bank loan.
- Canada Emergency Business Account (CEBA): Offers credit for small businesses to pay for immediate operating costs such as payroll, rent, utilities, insurance, property tax, etc.
- Canada Emergency Wage Subsidy (CEWS): Subsidy to allow eligible employers to keep employees on the payroll.
- Canada Emergency Commercial Rent Assistance (CECRA): Gives commercial rent payers a break on their rent albeit with some strict eligibility rules.
Relief repayment tips
Most of these relief programs offer loans to businesses to help them deal with costs ranging from payroll to rent to serving customers.
“But one of the problems I see,” Paisley says, “is that some businesses were overleveraged before COVID-19 so these loans aren’t going to help that if they weren’t able to pay the bills then.”
Paisley notes that “as per the guidelines, these funds are to be strictly used for non-deferrable expenses such as payroll, rent, utilities and insurance. It cannot be used to pay out existing debt facilities, dividends, etc.”
Paisley’s advice? Here's what to do:
- Open a savings account and move your CEBA funds to it. By doing this, you're moving those funds to a completely separate account where income & CEBA funds cannot be confused. Savings accounts are free accounts, so this doesn't cost you anything.
- Every time a non-deferrable expense clears your operating account, transfer funds from your CEBA loan. There's a direct, penny for penny, transaction that shows what the CEBA loan paid for.
- In a separate spreadsheet, make a record of every transaction that is transferred so you have a more accessible paper trail to follow for yourself, and any audit that is likely to come up!
Paisley also suggests that businesses use whatever runway these loans may offer to adapt to these very digital times right now. While many businesses already offer online stores, some have still avoided a full digital transformation, perhaps because of their traditional bricks-and-mortar legacy. That kind of thinking has to change ASAP, Paisley says.
“There should be an onus on businesses to spin up some solutions related to a digital offering,” he says. “Even if the economy recovers, it won’t be at pre-COVID levels, and people will still shop via different channels. We can’t crystal-ball it now, to know when things will return to normal. So it’s time to adapt to ensure your business is continuing to earn revenue.”
Caveats worth considering on COVID-19 rent relief
The Canada Emergency Commercial Rent Assistance program will offer 75 per cent of rent relief for April, May and June for small businesses impacted by the pandemic.
But Paisley points out several key details that could upset many businesses seeking rent relief: tenants must be paying less than $50,000 a month in rent, and also must have faced a revenue decline of at least 70 per cent from pre-COVID-19 levels, or they must have been forced to close down because of pandemic restrictions.
Many businesses have “worked VERY hard to pivot their business to online offerings, delivery, and so on, so they will not qualify as they may not have lost 70 per cent in revenue,” Paisley notes. “They would, however, have reduced their margins, and in turn, eroded any ability to consistently measure cash flow. The program does not consider those still working hard to save their business.”
He adds that for the government to use revenue as the main driver for eligibility, they are ignoring a key problem for some retailers:
“They're sitting on inventory, and need liquidity and cash, so they discount the inventory in an effort to get some cash back,” Paisley said. “It's helpful, but with a reduced margin, there's a chance these businesses aren’t breaking even on the sale, given the overhead.”
There’s no denying many businesses in Alberta and across Canada have been impacted significantly by the global sweep of the coronavirus. The good news is financial relief and guidance through these difficult times are available. For business owners, it’s only a matter of navigating these uncharted waters strategically and with a sharp eye on the future.
If your business has been interrupted in any way as a result of COVID-19, we want to help. Visit our COVID-19 relief page for business to get a full perspective of how we may be able to help you navigate through the current challenges and give you some time to plan for what’s next.