'I'm phobic of debt': Small business owners not in love with federal government's emergency loans

Canadian small business owners listened closely to Prime Minister Justin Trudeau and Finance Minister Bill Morneau on Friday as they announced the federal government's plans to help small businesses survive the financial crisis of COVID-19.

Many were encouraged by the new 75 per cent wage subsidy. Others were disappointed to hear that a big portion of the help for them comes in the form of loans.

"It's not something that I want to do. I'm already carrying debt as a small business," said Jason Komendat, owner of Retro Rides, a bike shop in downtown Ottawa.

The new Canada Emergency Business Account (CEBA), a program that will offer small businesses interest-free loans of up to $40,000, is not the best way to help small companies survive, Komendat and others say.

The CEBA program will provide up to $25 billion in loans that will be administered through Canada's banks, though the banks have yet to say how that will work.

The loans are guaranteed and funded by the government and intended to help small businesses pay for rent and other costs.

More details are to come about the program.

In addition to making the loans interest-free for the first year, the government will forgive 25 per cent of a loan, up to $10,000, for those who pay it back on time.

Komendat doesn't know how he'll be able to pay such a loan.

With bike shops deemed an essential service in Ontario, his store is open but sales are down dramatically.

He's running the shop solo, only open four hours a day going into what should be his peak season. His massive summer inventory of bikes and parts is collecting dust, and business could be slow for months.

A bicycle tour company that shares the shop's space may move out, which means Komendat's rent would double, and he might have to take the CEBA loan.

"I'm not even covering, not even close to covering expenses right now," he said.

Why even interest-free debt can be a bad deal

Experts say that for some companies, even interest-free debt such as a CEBA loan can be a big problem when sales slow to a trickle or vanish altogether.

"A loan may allow them to cover certain fixed costs, such as rent, but it will not make up for the lost revenue," said Werner Antweiler, a professor with the Sauder School of Business at the University of British Columbia in Vancouver.

Antweiler says that for businesses such as restaurants, customers won't come back more often or spend more to make up for being away when a business reopens.

"They will just hopefully return, and that lost business is not recoverable."

It's not only restaurants facing this problem.

Vancouver-based Jump Gymnastics, which teaches children movement skills, athletic co-ordination and flexibility, laid off 25 workers temporarily and shuttered both its locations, said owner Jennifer Hood.

"Let's say we're closed for four months. We won't ever have an opportunity to make up that revenue," said Hood.

When Hood does reopen, she predicts customers will only come back gradually.

"So, we'll be operating at a loss for a long time," said Hood. "So, then expecting us to somehow, with that margin, magically pay back a loan … I don't see it as viable."

Loans go against instincts

It's not just the practical concern of repayment that will hold back some small businesses from taking the government's CEBA loan.

"Taking out a loan kind of goes against the way that they philosophically think about running their businesses," said Eric Morse of Western University's Ivey Business School in London, Ont.

Wendy Friedman of Halifax is an entrepreneur who doesn't like borrowing for her business.

She owns a clothing boutique called Biscuit General Store and a home and gift shop called the Independent Mercantile. Pushing the problem down the road is not the answer for her.

"I'm phobic of debt and don't want to overburden our future with the panic of the present."

What kind of businesses CEBA loans could help

Morse says the CEBA loans will work for some companies, particularly those that are already well capitalized.

"Those startups that were using other people's money," said Morse, "they're thinking, 'Well, that's a little more debt. You know, this is great. I'm happy to take it. I'm either gonna go big or go bust anyway. So big deal.' They're happy to see a little extra help."

UBC's Antweiler said some manufacturers might also benefit from a $40,000 interest-free loan to help cover expenses while they are shut down.

"For example, if a company manufactures something that will experience delayed demand, because of the COVID situation, they will be able to make up a lot of the pent-up demand at a later point as people are buying those goods again."

Even Komendat acknowledges a loan could help him to a degree.

"So, say I borrow that $40,000, and I can pay the debt that I have right now that I'm paying interest on. It's going to be helpful to me, for sure. But it's not going to be enough for me to stay alive throughout this situation."

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'Backbone of Canada's economy'

On Friday, Morneau said that the CEBA loan program is designed to support "the local restaurants, the corner coffee shops, the small travel agencies, the salons and barbershops and the many other small businesses that form the very backbone of Canada's economy."

While Morse believes the government's small business package overall is positive news, he's concerned loans won't work for many "main street" small businesses.

"We're still going to see an awful lot of businesses go under," he said. "I just think that's a travesty for our economy and for an awful lot of hard-working folks out there."

Morse said there are other ways to use money to help.

A full or partial rent subsidy that businesses don't have to pay back could be one way, he said.

Grants for small business?

Another option might be grants.

Finland has a grant program in place for small businesses affected by COVID-19, as does Scotland.

Scotland's small business grant program is on top of loans and tax relief and is worth £1 billion (roughly $1.75 billion Cdn).

A grant program could be tied to innovation or the creation of new jobs, Hood said. She wrote an open letter to the government about the idea with another entrepreneur.

"I think there's a way that a lot of entrepreneurs in this country can really leverage that, and we would actually come out ahead instead of behind."

Komendat says he doesn't understand why large companies can get bailouts that are not repaid and workers are given wage subsidies while small businesses get loans.

"You know, for me as a business owner, and I work in my business, it's a real loss, and so it would be nice if they actually had some kind of grant or something they would offer small businesses rather than just offering us more debt."