To Loan or not to Loan

The Basics:

• The loans are available to businesses with  50 or fewer full-time equivalent staff which have had their revenue hit by more than 30% due to Covid-19.  
• The loans are calculated as follows: $10,000 per business + $1,800 per full-time employee up to a maximum loan of $100,000
• The loans are available INTEREST FREE for 1 year or, if not repaid in that first year, for a maximum term of 5 years at 3.0% interest
• Loan applications will be accepted starting 12th May 2020 – Loan applications close on the 12th of June 2020.
• The loan must be used to meet business costs and cannot be passed through to shareholders or owners of businesses through dividends

In regard to the so-called experts including an eminent Economist who are advising businesses not to take up the Government loan offer they are stating:

“You will be reducing your future borrowing capacity with the banks as the IRD have a higher ranking in the collection of their debt should you become insolvent (bankruptcy).”

And others stating that “this is not the time to be taking on more debt.”

What these so-called experts have not mentioned or considered in regard to the banks are: 

1. Most businesses in NZ employ less than 10 employees, so most of these loans will be less than $28,000.  Do the banks really care? 
2. The banks hold the lion’s share of the mortgage market which are $100,000+ loans.
3. Small businesses are probably the biggest users of Finance Companies.  As finance companies will secure loans over named assets such as a truck.
4. When banks lend to small businesses, they often use the business owner’s home as security or have the business owner give a personal guarantee thereby in effect still using their home as security.
5. Business owners would prefer to use company assets as security rather than their homes, hence the use of finance companies. 
6. The Government is not happy with the way the banks have treated businesses under the Business Finance Guarantee Scheme.

The other issue that they have not considered is seasonality in that outside of the main 3 cities the rest of New Zealand is largely seasonal with winter having the biggest impact on business turnover.

1. Subcontractors with the exceptions of electricians and plumbers are mainly subcontractors for a reason which is so that the large businesses can let them go during there off-season for instance road building including forest tracks, concrete laying and drain digging all slow down over the winter months.
2. Health and Safety regulations prevent many outside workers from working in the rain.
3. Horticulture which may have had a bumper season as far as growing stuff went, were hit by both labour shortages owing to travel restrictions and a vastly reduced domestic market owing to a 7-week lockdown of restaurants and other small outlets.  Over a third of the harvest was either not harvested or went to food banks.

Fortunately, the Government has a better understanding of New Zealand and New Zealand businesses so are extending the Work Subsidy for a further 8 weeks from the 2nd June to help eligible businesses retain staff plus offering potentially interest free loans to help businesses pay for their other overheads such as rent.

The businesses that I have spoken to see the Government Loan Scheme as a saviour to get them through the dark winter months are 4 to 7 weeks of either no or minimal income.

A point of interest since the Government loan announcement that banks have dropped their interest rates.