Recently a client reached out, and we landed on the topic of the $20,000 CEBA extension.
“More free loans? More debt forgiveness? Sign me up!”
This client had wanted monthly touchpoints to ensure he was taking the right steps with his business and initially wasn’t even going to consider asking about whether this extension was a good idea or not. This just seemed like more free working capital that he can keep a portion of in his mind.
Why wouldn’t he or anyone do it? After all, an interest-free loan with more debt forgiveness is desirable.
But as the old saying goes, make sure you read before you sign.
The borrower
The client’s business didn’t necessarily need the original $40,000 loan but wasn’t 100% sure about its future prospects and decided to apply for it as a “just in case.” The process was easy enough, and soon after applying for the loan, $40,000 magically appeared in his account. Since that time, this $40,000 has been just sitting there earning interest.
The trap
When you look closely, the $20,000 isn’t a separate loan; it is an extension of the $40,000 loan.
And when you apply for the $20,000 extension, this new agreement that you sign, including the terms and your representations, overrides what you agreed to under the $40,000 loan.
For example, under the new $20,000 extension, one of the conditions of this $20,000 loan requires you to certify:
that your business is facing ongoing financial hardship (including, for example, a continued decline in revenue or cash reserves, or an increase in operating costs) as a result of the COVID-19 pandemic.
This certification was not required under the $40,000 loan, which only required the borrower to intend to continue to operate its business or to resume operations and have $20,000 of payroll or non-deferrable expense. But as soon as you apply for the $20,000 extension, this certification will also apply to the $40,000 loan. So, if a person did not face ongoing financial hardship and applied for the $40,000 loan, applying for the $20,000 might be something to think about, especially since in the new CEBA agreement (and not in the old $40,000 loan):
Knowingly submitting inaccurate information or documentation as part of the Existing Attestation or this Attestation could result in criminal penalties of up to 14 years’ imprisonment, as well as significant fines, and the court-ordered repayment of any monies advanced.
The takeaway
The government will undoubtedly start to introduce some accountability towards all this spending. Make sure that you understand all of the details behind these programs, and if there’s any doubt, please reach out to us or an experienced advisor to make sure you have the proper guidance.
