Finance Minister Grant Robertson announced on 1 April that businesses can start applying for loans under the Business Finance Guarantee Scheme. The Scheme (outlined in our 25 March article) is a collaboration between the Government and banks, set up to support the New Zealand economy during the COVID-19 pandemic.
The Scheme will cover up to $6.25 billion in loans to New Zealand businesses. The central feature of the Scheme is that the Government is guaranteeing 80% of the risk of Scheme loans, while the banks are covering the remaining 20%. This assumption of most of the risk by the Government (taxpayers) will encourage banks to make business loans that may otherwise have appeared too risky, thereby increasing the survival chances of such businesses.
There are standard criteria for Scheme loans (outlined below), but otherwise a normal lending process will be followed by the banks. The banks have put their application forms on line so you can view and compare them, but we would expect that banks will be giving priority to existing customers. From the web-sites, it appears that it will take at least 7-10 days for applications to be processed. It also appears that other bank funding options may need to be exhausted first.
- New Zealand-based business
- Impacted by COVID-19
- Annual turnover of up to $80 million.
- Can apply once.
- $500,000 maximum loan amount
- 90 day minimum term and 3 year maximum term
- Primarily to support operating expenses while a business deals with the disruption caused by COVID-19. Capital expenditure can only be up to a maximum of 5% of the loan principal drawn.
- Cannot be used to pay dividends or for on-lending outside borrower’s guaranteeing group
- Can only be used to refinance existing debt if it is a loan advanced on or after 16 March 2020 that meets other criteria (including the other criteria for Scheme loans)
Scheme loans cannot be made to fund anyone engaged in:
- Property development and property investment
- Local government (i.e, a local authority, a council-controlled organisation or a council organisation for the purposes of the Local Government Act 2002)
- The supply of recreational cannabis
- The processing of whale meat
- The manufacture of cluster munitions, nuclear explosive devices, anti-personnel mines, tobacco, and civilian automatic and semi-automatic firearms, magazines or parts
- Any other activity notified by the Crown to banks in writing, with effect from the date of that notification.
Apply for a loan?
You may meet the qualifying criteria as above and the bank’s own lending criteria. But, as with any commitment, you also need to weigh up the pros and cons of taking on the additional debt. We fully expect that banks will require personal guarantees and in that case you will also have to think carefully about putting your personal assets on the line, at least in respect of the 20% not guaranteed by the Government.
While the information requirements might differ depending on your Bank and your circumstances, generally you should expect to provide the following information in support of your application
- Your last set of financial statements for the business
- A copy of your most recent tax return
- A cash flow forecast detailing your income and essential expenditure for at least 3 months and what a return to more normal business might look like over 2-3 years.
- A personal statement of positon
BDO will be able to assist you put this information together to ensure you are providing a robust plan of how things look for your business and how you will service the loan.
This also raises the question of what happens to the borrower if the Government guarantee is called upon. The usual position would be that the Government becomes the lender in respect of the amount that it pays to the bank under the guarantee, but it is not yet clear whether the Government will then enforce or remit that amount. Enforcement will simply mean that your creditor has changed
If the amount is remitted, current tax rules provide that the borrower is treated as having derived assessable income equal to the remitted amount. That may not be such a problem with a standard company or a limited partnership as the borrower as the income will not (ordinarily) be attributed to the shareholders or to the limited partners. But it could affect individuals in other cases (eg, sole traders, partnerships, LTCs).
Information in this article was last updated 18.05.2020