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UPDATED: Federal payroll test shuts out small businesses from COVID-19 loan

"I can't, in my mind, reconcile why that would be a driving factor for eligibility," said Herc's Nutrition owner of $50,000 payroll minimum.
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Owner David Niebach, owner of Herc's Nutrition in St. Albert, said the new business does not qualify for the federal government's $40,000 loan because of payroll requirements. BRITTANY GERVAIS/St. Albert Gazette

Update

This story has been updated with more information.

When Herc's Nutrition first opened in St. Albert last November, owner Daniel Niebach knew they'd be in the red at first, but expected to eventually balance out in the spring. 

Then everything changed when the COVID-19 pandemic hit Alberta, putting a halt on cash flow even before the vitamins and supplements store had a chance to break even.

Scrambling to find income, Niebach said he was hopeful the federal government's $40,000 Canada Emergency Business Account (CEBA) loan would be enough to keep the business alive long enough to balance out their budget. 

To be eligible, small businesses must demonstrate they paid between $50,000 and $1 million in total payroll for 2019. 

However, by tying this relief fund directly to payroll, the federal government is effectively shutting out any new businesses that opened since Jan. 1, Niebach said.

The small business has only two employees and two months of operation to show for last year, falling below the $50,000 payroll minimum. When he tries to submit an application, an error message appears.

"The threshold that's been established of having $50,000 in payroll ... I can't, in my mind, reconcile why that would be a driving factor for eligibility," he said. 

"Why is having $50,000 in payroll the magic number to getting the small business loan? Even if we have no payroll, we still have rent, that's our biggest cost." 

According to a recent survey from the Canadian Federation of Independent Business (CFIB), 45 per cent of small businesses in Alberta say they plan to use the CEBA, while 20 per cent say they want to use it but are not eligible. Only 11 per cent say they don’t need it, with the rest unsure.

“These loans can’t be available fast enough and we strongly recommend eliminating the payroll test and making the $10,000 forgivable portion a simple grant that is available quickly,” stated CFIB executive vice-president Laura Jones in a media release. 

“If we don’t do a good job helping small businesses survive this today, the cascading effects will be felt for years to come. They are the job providers and creators for millions of Canadians. They are the connective tissue of our communities. Small business really is too big to fail."

Niebach said change needs to happen fast, as all other supports previously announced don't seem to apply to small new start-ups, or could result in the accumulation of more debt over time.

Herc's Nutrition hadn't built up enough credit to qualify for a bank loan, he explained, and the Business Development Bank of Canada (BDC) said it couldn't offer any additional help with their existing credit. 

As a family-owned business with two employees, the federal government's wage subsidy doesn't help because someone needs to be at home with the kids, he said. Although their landlord agreed to defer two months of rent, the money owed is just tacked on to future months. 

Right now, Herc's Nutrition is dipping into their personal funds to be able to afford utilities and pay their vendors. While the business could defer interest on credit card payments, the interest just compounds over time, Niebach said. 

"As a business owner, you're being put in a very tough position. Besides potentially closing your business, you could ruin your credit."

The strict payroll test has shut out another small business in St. Albert, putting them at risk of bankruptcy in a matter of months. 

Jessica Robertson, owner of Viva Tan Beauty Boutique, said she was denied from accessing the CEBA because the beauty salon's payroll was short, roughly $5,400 of the $50,000 requirement, for 2019. 

Cut off because of a few thousand dollars, the $40,000 loan would have allowed the business to stay afloat for at least a few more months, she said. Right now, the business is trying to survive on what's left - $20,000.

"I know that I'm going to drain that account pretty damn fast," Robertson said. "And I'm not going to be able to reopen."

The salon employs four people with two locations in St. Albert. The second storefront off the St. Albert Trail near Chapters just opened last October.

To build the business, Robertson said she hasn't taken a single paycheck for herself in three and a half years, logging multiple 12 to 14 hour days. Now, her sacrifice feels more like a punishment.

"Had I paid myself I'd have been well over payroll, but we built a new location last year. So, all last year, I didn't pull a dime, not a dime," she said.

Adding on to the stress, Robertson doesn't qualify for the Canada Emergency Response Benefit (CERB) because she couldn't report $5,000 in income. She said she doesn't qualify for unemployment insurance, either. 

Her landlord has been the only source of relief so far by deferring half of the monthly rent for April, but she said she doesn't know what will happen when May comes.

"What the government is doing, is they're helping the banks. They're helping the big business that could survive this. They're not actually helping small businesses  - the ones who have had to close, or who have already laid off their staff," Robertson said. 

"It doesn't do any good to pay 75 per cent of someone's wages - I don't have the other 25 per cent."

Ken Kobly, Chamber of Commerce of Alberta president and CEO, said there have been constant discussions between the Canadian Chamber of Commerce and the federal government on ways to catch businesses falling through the cracks.

The government didn't have the luxury of time to roll out these supports, he said, and there are still some glitches to work through.

"I think the federal government thought those numbers will fit the target groups that we're trying to get. But they didn't consider, under the lower limit, brand new businesses," Kobly said.

Placing a $1-million limit on the other end of the scale can also be a barrier for small businesses with more people on the payroll.

"You may think ($1 million) is a lot, but it's a tire shop," he said. "You can easily rack that number up if you had 20 employees,"

But the solution doesn't have to be complicated, he said. Asking basic questions around these requirements could identify barriers along the way. 

"They need to ask these questions," he said. "If your payroll is below $50,000, is this due to the fact that you just started up a new business? If so, provide us with your date of incorporation. Then you've got the loan."

On Thursday morning, Susanna Cluff-Clyburne, Canadian Chamber of Commerce senior director for parliamentary affairs, brought the issue of the arbitrary limits before the federal standing committee on finance.

She said the reasons why some businesses don't qualify for the CEBA "simply don't make sense," pointing to another small Alberta business who had to lay off their staff and cut back on operations because of the virus, but wasn't eligible for the loan because its payroll exceeded $1 million.

"If an incentive to make it as easy as possible for businesses to qualify for support programs, and to get that help to them while they're still around to use it, ever existed, today's employment data is surely it," Cluff-Clyburne said. 

According to Statistics Canada, Canada's economy lost more than 1 million jobs in March because of COVID-19, with approximately 21,000 jobs lost in Edmonton.

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