Covid-19 Week 3 update: The Business Finance Guarantee Scheme and other tools
As we head into week three of the Covid-19 Level Four Alert, our focus has started to move from assisting customers obtain short term debt relief solutions, towards options as businesses look ahead at their post-lockdown requirements.
The Business Finance Guarantee Scheme has received significant media attention. Under this scheme, businesses with annual revenue of between $250,000 and $80 million can apply to their banks for loans up to $500,000, for up to three years. The government is guaranteeing 80% of the credit risk, while the banks will take 20% of the risk. This scheme is in the early stage of being rolled out, and each bank is at varying stages of working through the details of how they will assess and administer applications for this lending. Based on our early assessment, there are some key points businesses need to consider before applying for this support:
- The government guarantee is to the bank, not to the business borrowing the funds. The business borrower is responsible for repayment of the loan principal plus interest within a 3-year time frame.
- 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. Funding applications will need to meet standard bank credit assessment criteria, such as debt servicing ratios based on existing commitments, plus proposed new ones.
- Each bank will set their own criteria, and information requirements may vary. Already we have seen one bank asking for a general plan that shows your business can return to normal within 12 months, and another bank asking for more detailed information including cash flow forecasting.
- This lending will be supported by security already held by the bank. This will include a General Security Agreement and personal guarantees, but may also include other property security held by the bank. In the event your business cannot make its payment obligations, the bank will seek to recover its money from you and any property held as security. In that respect it is no different from any other loan. If the bank has a shortfall then they can call on the government for 80% of the shortfall.
- The loan can only be used for urgent working capital requirements relating to Covid-19. It cannot be used for things like capital asset purchases, refinancing of existing debt, payment of dividends or on-lending outside the borrowers group.
- Some sectors, such as agriculture, property development and property investment are excluded.
- In general, you will only be able to apply to your existing transactional bank for this lending.
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.
As businesses navigate through the current lockdown, it is important that you utilise the range of tools available to manage the likes of short to medium term cash flow. It is the time that businesses may wish to reduce unnecessary spending, apply for relief that is available, but also take time to assess their forward looking position. New Zealand Trade & Enterprise have produced and made publicly available a range of cash flow workbooks, guides and tools. These tools are free and available at https://covid19.nzte.govt.nz/page/useful-tools.
A range of assistance may be available through the Regional Business Partner Network https://www.regionalbusinesspartners.co.nz/. In many cases, 50% of the cost of this work will be covered by vouchers offered within this scheme.
Many accounting firms are providing commentary on the impacts Covid-19 may have on different sectors of our economy. KPMG have produced a good guide around Covid-19 for a number of key industries we work in – well worth a read when you have some down time. https://home.kpmg/nz/en/home/insights/2020/03/business-implications-of-covid-19-coronavirus/industry-implications.html
The last two weeks have been an extremely busy time for our team. We have worked hard to support our clients with debt repayment relief, and have remained open for new funding. Predominantly new lending has been for essential services and for some clients who are taking advantage of opportunities to buy equipment at discounted prices. We are also seeing increased enquiries from businesses about loan refinance, consolidation and restructure with a view to resetting forward cash commitments.
We trust you are managing through this challenging time and if you would like further information please don't hesitate to contact your Finance New Zealand Business Partner.