COVID-19: Banking, Lending and Credit

Jerry Cukier
| 3/21/2020
COVID-19 Banking, Lending and Credit

As COVID-19 continues to invade on a global level and here at home, lenders are currently seeking various ways to do what is possible to support their existing clients.

What We Know Right Now

On March 18, the Government of Canada announced a federal economic aid package worth $82 billion to help Canadian workers and businesses weather the COVID-19 storm. This will include up to $27 billion in direct support to Canadian workers and businesses, plus $55 billion to meet the liquidity needs of businesses and households through tax deferrals to help stabilize the economy.

Role of Financial Institutions

The Minister of Finance is in regular contact with the heads of Canada’s six largest banks (Bank of Montreal, CIBC, National Bank of Canada, RBC Royal Bank, Scotiabank and TD Bank) and continues to encourage them to show flexibility in helping their customers whose personal or business finances are affected by COVID-19. The Superintendent of Financial Institutions has also made clear his expectation that banks will use the additional lending capacity provided by recent government actions to support Canadian businesses and households.

What Will That Look Like For You?

Banks in Canada have affirmed their commitment to working with customers to provide flexible solutions, on a case-by-case basis, for managing through hardships caused by recent developments. This may include situations such as pay disruption, childcare disruption, or illness. Specific measures include:

  • Canada’s largest banks have confirmed that support will include up to a 6-month payment deferral for mortgages, and the opportunity for relief on other credit products.
  • The Canada Mortgage and Housing Corporation (CMHC) and other mortgage insurers will also offer tools to lenders to assist homeowners including payment deferral, loan re-amortization, capitalization of outstanding interest arrears and other eligible expenses. CMHC will permit lenders to allow deferred mortgage payments on loans the Crown corporation insures against borrower default. CMHC has said it will deploy a “market liquidity tool” as well, which it brought out during the global financial crisis and will now use to buy up to $50 billion of insured mortgage pools.
  • The Business Credit Availability Program (BCAP) will allow the Business Development Bank of Canada (BDC) and Export Development Canada (EDC) to provide more than $10 billion of additional support, largely targeted to small and medium-sized businesses.
    • BDC and EDC are cooperating with private sector lenders to coordinate credit solutions for individual businesses.
    • The near-term credit available to farmers and the agri-food sector will also be increased through Farm Credit Canada.
  • To support businesses that are facing revenue losses and to help prevent layoffs, the government is proposing to provide eligible small employers a temporary wage subsidy for a period of three months. The subsidy will be equal to 10% of remuneration paid during that period, up to a maximum subsidy of $1,375 per employee and $25,000 per employer. Businesses will be able to benefit immediately from this support by reducing their remittances of income tax withheld on their employees’ remuneration. Employers benefiting from this measure will include corporations eligible for the small business deduction, as well as non-profit organizations and charities.
  • The Bank of Canada cut the interest rate to 0.75% as a proactive measure.

Suggested General Strategies for Clients

  • Companies should assess their liquidity needs and implement short-term cash flow monitoring, allowing them to predict cash flow pressures and react in a time-sensitive manner. Businesses should consider maintaining strict discipline on working capital, particularly around collecting receivables and managing inventory build-up. It is also essential to proactively review working capital management and inventory forecasts, alongside supply and demand predictions. Throughout the foreseeable future of COVID-19, companies should maintain regular contact with suppliers to identify any potential risks.
  • Re-evaluate any cross-border financing activities to ensure that the debt/equity mix is appropriate for our current economic climate. Additionally, make sure that the rate imposed on the debt, guarantee fees, as well as management fees are appropriate and withholding tax obligations are complied with to avoid penalties or late-payment interest.
  • Focus on tax management when planning your overall cash management strategy. Being proactive could help offset declining profits and shrinking margins. Remember to consider non-cash employee benefits, indirect taxes (i.e.: GST/HST), bad debt write-offs, trade and customs. It’s important for businesses to review the tax efficiency of operations, taking advantage of any opportunities to defer or reduce tax payment.
  • As a precautionary measure, now is the time to capitalize on any credit and/or term repayment postponement made available to your company. To avoid any technical debt breaches, businesses should review terms and conditions on loan contracts to identify sensitive debts. Reviewing will also allow companies a chance to proactively manage the dialogue and communications with creditors regarding any necessary amendments to existing terms or refinancing arrangements. Business owners should also review other short-term solutions, such as a BDC Small Business Loan. BDC currently offers a program through which qualifying non-BDC clients can rapidly obtain up to $100,000 by applying online.
  • Look for the silver lining. The COVID-19 crisis could present an opportunity for many businesses to restructure and reposition themselves for when things return to normal. Companies should review their corporate structure, considering the possible impact of thin capitalization, M&A restructuring issues, transfer pricing, as well as any niche industry issues that could apply. Staying ahead and proactively managing these risks and opportunities may potentially deliver savings in the future.

How Can Crowe Soberman Support You?

In these uncertain times, it is essential to remain agile and proactive as the COVID-19 situation unfolds. Having timely access to financial experts, insights and news as quickly as possible is critical—and that’s where we can help.

We have established a dedicated COVID-19 Resource Hub, highlighting areas of business operations that will likely be impacted by coronavirus. Whether you need to discuss your current financial situation and learn what options are available to you, or you want to be guided through the appropriate cash flow management strategies for your business, our team of experts are ready to help you at every step of the way. Please do not hesitate to reach out to your Crowe Soberman professionals for support during these challenging times.

We are in this together.

This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this article. Please note that this publication should not be considered a substitute for personalized tax advice related to your particular situation.

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Jerry Cukier
Jerry Cukier
Partner, Audit & Advisory
Jerry Cukier Professional Corporation