Coronavirus – Small Business Cashflow Loan Scheme

The government has announced a new interest free loan facility for SMEs, along with some overdue changes to the existing Business Finance Guarantee Scheme.

Small Business Cashflow Loan Scheme

This newly announced scheme provides a loan facility for SMEs that employ 50 or fewer staff. The amount is capped at $100,000.00.

These loans will be interest free if they are repaid within a year.

If the business requires a longer term, the interest rate has been set at 3% for up to five years. Repayments will not be required for the first two years of the loan.

The government has set some arbitrary limits on the size of the loans to be drawn down based on the number of employees each firm has.

Every firm will qualify for a base loan of $10,000.00.

After that, the business can draw down an additional $1,800.00 per full time employee.

For instance, a firm with 50 employees would qualify for an additional $90,000.00 (50 x $1,800.00). A firm with three employees would qualify for an additional $5,400.00 (3 x $1,800.00).

Loans can be utilised for core operating costs of the business including, but not limited to, insurance, supplier payments, rent or utilities.

The loan cannot be passed onto shareholders or owners of a business by way of a dividend or on-lending.

Owners will need to declare that they have a viable business and will enter into a loan contract.

Inland Revenue will be administering the scheme and will take applications from 12 May 2020.

The government intends that this scheme will only be open for one month from that date.

Business Finance Guarantee Scheme – Important Change

The previously announced Business Finance Guarantee Scheme is being changed. There has been a chorus of criticism in recent days around the need to provide collateral with these loans and the government has acted.

The United Kingdom had a similar scheme but reduced the rules around security for these loans. The New Zealand government has followed suit.

For loans of more than $50,000.00, the trading banks will no longer need to use their best endeavours to obtain security from the borrower using a general security agreement.

Our View

We welcome the cashflow loan announcement at such such a critical time in the business cycle. Cashflow is the number one concern for all SMEs at the moment. Many may have recommenced work this week with the knowledge that they may not be paid for another month or more.

The change to the Business Finance Guarantee Scheme is a clear admission that the original scheme simply was not working. The government has listened to business. They have looked at the UK example and changed the terms of the scheme accordingly.

We still advise caution for all SMEs who want to enter into a loan agreement. Loans need to be paid back and it is essential that business owners have thorough cashflow forecasts, prepared conservatively, to show that any lending is prudent.

The Treasury has released more information which you can read here.

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