Roughly 200,000 small businesses took on new debt to access the forgivable portion of their pandemic relief loans from the federal government, the Canadian Federation of Independent Business said Tuesday.

Many businesses took private bank loans with high interest rates to pay back enough of their Canada Emergency Business Account loans to qualify for partial loan forgiveness, CFIB president Dan Kelly said Tuesday.

Meeting the new payment obligations will be a challenge for some, he said.

"This has caused a real constraint on businesses," Kelly said in an interview. "They do so, in so many ways, with a gun to their head because they had no choice in order to access that forgivable portion."

The federal government provided up to $60,000 in interest-free loans to help businesses and non-profit organizations survive pandemic-related shutdowns and slowdowns.

Businesses that paid off the required portion of their loan by the repayment deadline were eligible to have the remainder forgiven. Those that missed the deadline lost out on the forgivable portion and saw their debt converted to a three-year loan with interest of five per cent annually.

The CEBA repayment deadline was extended twice, as businesses dealing with inflation and a slowing economy struggled to come up with the cash, and expired on Jan. 18.

However, a special extension to March 28 was allowed for companies to refinance their loans with a financial institution instead.

As Thursday approaches, Kelly said, some of his organization's members are growing anxious.

"We're starting to get a bunch of calls from business owners that are still facing a level of CEBA panic," Kelly said.

According to the government's CEBA database, more than 28 per cent of businesses have fully paid back their loans. Of the remainder, 65 per cent expect to fully repay the loan by the end of 2026.

Kelly speculated business owners on the verge of defaulting are likely to pay just the interest and not be able to keep up with their obligations.

"That should send an alarm bell to public policymakers," he said, as many small-scale businesses are facing bankruptcies.

The Office of the Superintendent of Bankruptcy said last month that the number of insolvencies filed by Canadian companies in 2022 was up 37.2 per cent compared with 2021.

The small business association is calling on Ottawa to establish partial forgiveness for businesses in the next three years as they start repaying their principal amount.

It is also urging banks to be compassionate toward businesses as they seek refinancing.

This report by The Canadian Press was first published March 26, 2024.