A plan to manage small business debt caused by COVID-19

6 min read
Richard Sklar

Canadian small businesses were hit hard by COVID-19 lockdowns and other public health measures. While sectors such as hospitality, arts, and recreation were hit especially hard, few businesses managed to get by without taking on additional business debt.

The average Canadian small business owner took on 170,000 in debt.

Those small ventures that survived the pandemic may still be carrying debt accrued during that period. It's important to make a plan to manage that business debt.

These steps can help you assess the state of things and create a plan for dealing with debt going forward.

1. Assess the financial damage

Small business owners work hard to repay the money they borrowed just to open up. Whether it was a loan to open an online store or get by while they gained clients, paying it back feels like an accomplishment.

Going back into the red to survive a crisis like COVID-19 can feel like a major step back.

Keep in mind that the COVID-19 crisis was unlike anything the world has seen in over a century.

Just surviving was an achievement.

The first step in turning things around is to assess the financial damage. Now is a good time to update financial statements such as cash flow or profit and loss statements.

Related: Cash flow statements made easy

2. Update your business plan

Business models that worked pre-pandemic may need updating to meet changed consumer expectations and behaviours.

  • Businesses that once relied on foot traffic may need to expand their digital presence and start selling online.
  • Hospitality businesses and services that relied on office workers or commuters may have to consider moving to a more residential or entertainment-oriented area.

Business owners already struggling with debt may be reluctant to borrow more. But if your business model has become unsustainable, a low-interest loan may offer a way to adapt to the new reality.

Related: Resources for Black-owned businesses in Canada

3. Reduce your take-home income

Every small business owner has put in sweat equity to get their business off the ground.

Business owners may need to go back to those roots and reduce how much they take out of the business.

Small business owners committed to repaying the debt they accrued during COVID-19 may need to start reinvesting sweat equity in paying off those debts.

4. Continue to draw on COVID-19 supports

While CRB payments to individual workers ended some time ago, to be replaced with the Canada Worker Lockdown Benefit, there are still active programs designed to help small businesses survive and recover from COVID-19.

These supports can help you avoid going deeper into debt or free up cash flow reserves to pay back what you already owe.

Canada Emergency Rent Subsidy

The Canada Emergency Rent Subsidy has been extended for two classes of businesses:

  • Those that qualify for the Tourism and Hospitality Recovery Program
  • Those that qualify for the Hardest-Hit Business Recovery Program

Until March 12, 2022, businesses in tourism and hospitality can receive up to 75% of their rent subsidy based on their current-month revenue decline.

Those that qualify for the Hardest-Hit Business Recovery Program can receive up to 50%. From March 13, 2022, to May 7, 2022, subsidies will be provided at half those rates.

In addition to the Canada Emergency Rent Subsidy, qualifying businesses in areas where mandatory public health orders have been issued can receive an additional 25% in rent support.

Canada Emergency Wage Subsidy

The Canada emergency Wage Subsidy is likewise still available on similar terms. It is also split between the Tourism and Hospitality Program and the Hardest-Hit Business Recovery Program, providing the same subsidy rates as the Canada Emergency Rent Subsidy.

Your business may qualify under the Hardest-Hit Business Recovery Program if it has:

  • Seen an average monthly revenue reduction of at least 50% over the first 13 qualifying periods for the subsidy
  • A current-month revenue loss of at least 50%

Canada Recovery Hiring Program

The Canada Recovery Hiring Program provides hard-hit businesses with a subsidy for:

  • Hiring new workers
  • Increasing workers’ wages
  • Increasing their hours

As the labour shortage continues to make hiring a challenge, small businesses need all the help they can get bringing on new workers.

The government has proposed an extension of the Canada Recovery Hiring Program to May 7, 2022. Eligible employers with revenue loss above 10% can benefit from the subsidy, and the subsidy rate is 50%.

Highly-affected sectors credit availability program (HASCAP)

Businesses operating in those industries most heavily impacted by COVID-19 may be eligible for low-interest loans of between $25,000 to $1 million. These loans are designed to cover operational expenses.

Eligible business include:

  • Restaurants
  • Tourism and hospitality
  • In-person services

A low-interest loan through HASCAP may be a better alternative than going to a bank. However, many business owners already struggling with existing debt may be more interested in ways to survive as they pay it off.

Know your business debt relief options

Overwhelming debt doesn’t have to be the end of your business. If you are already in a position where you’re considering bankruptcy, you may want to explore other options for debt relief for small businesses.

Division I Proposal

One of those options is a Division I Proposal, which enables small businesses to avoid bankruptcy while clearing their unsecured debts after they repay only a portion of what they originally owed.

Any sole proprietorship, partnership, or corporation is eligible to file a Division I Proposal.

A Division I Proposal will most likely require audits, cash flow analysis, tax liability assessment, and business operation assessment. However, if a Licensed Insolvency Trustee and business owner still agree that a Division I Proposal is the best way forward after these reviews, the business owner may be able to clear their debt and continue operations.

In the proposal, the business agrees to repay a portion of its debt over a certain amount of time. The creditors will still have to agree, but it provides a way out of debt while keeping a business open.

Filing a Division I Proposal will also stop collection calls, interest charges, and legal actions until creditors have an opportunity to accept or reject the proposal.

You are not alone in this

Couple talking

Small businesses need all the help they can get to overcome pandemic-related debt. After reviewing your business’s financials, consider ways you can adapt your business plan, explore ongoing government supports, and learn about your options if unsecured debt threatens to close your business.

This post should not be taken as legal or financial advice. Always consult a financial professional before making decisions about business debt.