Covid-19 UPDATE: Restarting your business under Level 3
As we head into the second week of the Covid-19 Level 3 Alert, we have seen many of our key industries return to work. Businesses are now better positioned to look ahead at their financing requirements post-lockdown.
After at least four weeks of very limited or no trading for most businesses, the immediate need is to assess what short term cash requirements are necessary to restart operations and manage cash outgoings until they are paid by their debtors. Many businesses will not see cash inflow until late June, and even then with uncertainty about turnover and costs operating under Level 3 restrictions. Understanding likely cash requirements, and having a cash buffer for ongoing uncertainty, is also very important. Our team is dealing with an increased number of working capital enquires, and we are managing these across the range of tools we have to assist. The options vary from:
- Invoice financing (raising money against your debtor book).
- Traditional bank overdraft funding (typically leveraged against business or property security).
- Asset finance by way of raising funds against owned freehold or lightly encumbered vehicles, plant or machinery and injecting those funds into the business.
- Leveraging equity in property assets with both bank and non-bank lenders able to provide options.
- Trade Finance to assist with the importation of stock into New Zealand.
- Non-bank Fintech lenders who have more recently entered the market and provide small working capital funding lines.
Our bank and finance company funding partners are also adapting to their new environment. During the first two or three weeks of Level 4 lockdown, most lenders were focused (and somewhat overwhelmed) by the large volume of debt relief requests they had to work through. Some are still working through their backlogs of requests. This has been a massive challenge, but in general, our funding partners have been supportive and realistic about providing this support. Many staff within those organisations, including our own, have worked long hours managing these requests and we thank them for the work they have undertaken to date. As an example, feedback from our funding partners in the asset finance market suggests that between 20% and 50% of their individual client portfolios have requested some form of debt relief. This has been provided either by way of interest only, or suspended payments. One lender told us they have processed six times their normal monthly volume of loan requests in the last four weeks, but almost all in the form of debt relief, rather than new lending.
Since we entered Level 3, we are seeing an increased level of application for general business lending, be it new machinery, property settlement, or businesses assessing their longer term debt requirements and looking at the value of restructuring to reduce forward cash outgoings. We are also seeing an increase in applications and referrals where incumbent lenders have said “no”, are being onerous in their requirements, or are taking too long to look at transactions.
This reflects a lending environment that has rapidly changed. Both bank and finance company lenders are now assessing the impacts on their ability to proactively lend into an uncertain economic outlook. Some funders are very much open for business, whereas others are taking a more cautious approach and have significantly limited their lending appetite. We have close to 30 different funding partner options to work with. The appetite shown by each lender can change regularly so as lender appetites change we are able to adapt where we take transactions, and what sort of funding solutions we provide. Ultimately, we have found a home for almost all of our client requests in recent weeks. What has changed is the quantity and quality of financial information required to obtain the best possible funding. To have the best chance of a funding request being successful we must present an application that demonstrates:
- Our client’s business was viable going into Covid-19.
- An overview of the immediate impact of Covid-19 of the business’s operations, income, and what this means for short term cash flow requirements. We must demonstrate that the customer has adequate cash to manage their short term needs, or that the funding application itself addresses this. Short term cash flow forecasting is very helpful in this regard.
- The medium term outlook for the business using a set of reasonable assumptions. While lenders accept it is difficult to assess what “normal business” means going forward, we need to present a plan that shows a viable business based on current and proposed debt commitments, with best possible assumptions about forward trading.
- Funders, in many cases, are requesting more “skin in the game” from borrowers. They are less prepared to take all the risk, without the borrower putting equity into the transaction. Lenders are looking for deposits where they may have previously approved 100% funding, or are wanting lower Loan to Value ratios than they were pre Covid-19. Borrowers need to accept that to obtain funding they may need to put more personal equity into a transaction.
Overall, the wide range of funding options we have ensures we are well placed to assist any business to access funding.
We have continued to see government roll out schemes to assist businesses. A good summary of what is available is at https://www.business.govt.nz/covid-19/.
The Business Finance Guarantee Scheme has received significant media attention over recent weeks. Feedback from our banking partners indicates there has been only moderate uptake of this scheme. Borrowers have realised the guarantee is for the benefit of the bank, the lending will be supported by all security held by their bank, and that substantial credit assessment was required to obtain this funding. On Friday 1 May, the government announced a widening of the scheme, with the key changes being:
- The requirement for the bank to hold a General Security Agreement over the borrowers business has been removed. In theory, this allows the bank to provide this lending on an unsecured basis. However, in our view, banks are likely to still require security for this lending, and the lending will remain linked to securities they already hold.
- The requirement for businesses to have at least $250,000 of annual turnover has been removed. This will allow small (largely sole trader) businesses to qualify. The $80 million upper limit remains in place.
- Borrowers will no longer have to draw on existing facilities before applying for a loan under this scheme.
- Agricultural businesses, previously excluded from the scheme, may now apply.
Overall though, the fundamentals of the scheme appear largely unchanged. Each loan application will be assessed on its merits. The banks have an obligation to demonstrate that the business was viable going into this crisis, and each business will have to demonstrate to their bank a viable business plan for trading post Covid-19. The credit risk remains with the borrower, and default on loan obligations under this scheme would enable the bank to call up any other securities it holds. If your business is considering applying for a loan under the Business Finance Guarantee Scheme, please feel free to talk to us. Our team can provide general advice, and may be able to present a request to your bank.
Also on 1 May 2020, the government announced a new scheme, the “Small Business Cashflow Loan Scheme”. This will be administered by IRD, and provides small working capital loans with a base amount of $10,000 increasing by $1,800 per full time staff member, to a maximum of $100,000. These loans will be interest free if repaid within 12 months, and accrue interest at 3% per annum beyond that to be repaid within five years. These loans can be used for core business operating costs, with the purpose of supporting the business to remain a going concern. Information on the application process, or who would qualify, remains fairly unclear. More information is available here https://www.beehive.govt.nz/release/government-boosts-cashflow-support-small-businesses or https://www.interest.co.nz/business/104805/small-business-cashflow-loan-scheme-details-unveiled-govt-write-viable-small.
We are pleased New Zealand seems to have avoided the worst case health outcomes of the Covid-19 pandemic. We are glad to see many of our customers now operating again, and while our own business is “working from home” until Level 2, we are well-equipped to play our part in getting the New Zealand economy back to action. If you would like further information on any of these topics or to discuss your business needs or any funding solutions you may require, please don’t hesitate to contact your local Business Parrtner today.