Business Deferrals as COVID is Evolving

There’s no denying that the COVID-19 pandemic has had an enormous impact on our local economy, and economies around the world. In Canada, a significant dip in oil prices, commodities and the mandated closure of non-essential services has had repercussions on businesses big and small. As a result, many business owners are seeking financial relief from the government and their financial institutions.  In Ontario and the GTA specifically, home to 30% of Canada’s population, small businesses have been decimated, employees are scrambling to make ends meet.  

The government has definitely helped in getting people to simply meet their basic necessities, but we are in for a long and dreadful recovery.  

We would like to focus a little on the Business Owners today.  As most of the country is now in Stage 2 of the Crisis, and many business are slowly re opening, we thought to give some advise and reminders of the many things to consider during a time like this.

As one measure of financial relief, many financial institutions, are offering deferrals for mortgages, credit card debt and business loans. 

If your business is experiencing financial hardship due to COVID-19, you’re likely considering relief options such as this (if you haven’t taken them already). But is deferring your loan the right move for your business?

Every business has a different situation – I hope this Blog will help you weigh the decision to defer your business loan or not.

What’s been the impact on your revenue?

Have you been able to continue operating with the imposed health and safety measures or has your business had to completely shut down? Evaluate how stable your business is under these new conditions and look at your cash flow. Has it been severely impacted?  Also, how have your fixed expenses changed? Are you paying the same overhead costs as before (is there an opportunity to decrease these?) and how does that factor in with your current revenues? A deferral may help to close this gap and allow you to stay in business longer.

Consider the business model and size of your organization

If you’ve been able to shift your business model or change the way you deliver products or services – great! Finding creative ways to continue generating revenue adds to the stability of your business.  Maybe you’ve considered downsizing your organization and leveraging federal programs like the Canada Emergency Wage Subsidy (CEWS) to support your employees? This can help significantly if labour is a large fixed expense for you.  If not to support your payroll costs specifically, are there other ways to shift your organization to fit within the definition of federally funded industries? This can alleviate stress on your cash flow and might allow for enough funds to make your regularly scheduled loan payments.

What does a deferral mean for your payments now and in the future?

Deferrals can have varying terms depending on the financial institution that your loan is through. With many Financial Institutions, you have choice, you can defer both the principal and interest portion of your payment, or just the principal alone.  Choosing to defer your entire loan payment (principal + interest) means that interest will still accrue during the deferral period, PLEASE DOUBLE CHECK THAT YOUR INSTITUTION  doesn’t capitalize interest (which means to charge interest on interest). You’ll still pay interest eventually, just not any extra because you deferred.

If you’re able to continue paying the interest portion of your loan payment – do it! It’ll make it easier to catch up on your payments later.

How will this affect you long-term?

A business loan deferral is not "loan forgiveness". You’ll still have to repay the debt at some point. What will this mean for your business in the long run? How will “catching up” on your loan repayment affect things such as future expansion plans, business development initiatives, investments in infrastructure or technology upgrades, etc.?

Consider what changes may come as Toronto, Ontario, Canada, and the world, moves forward in recovery. This won’t last forever, and your business's response can help its recovery and determine what the future will look like.

Overall, if deferring your loan lets you sustainably pay your staff, create product, or continue your services, then it likely makes sense.