The Small Business Cashflow (Loan) Scheme (SBCS) has been introduced by the Government to support businesses struggling due to a loss of actual or predicted revenue as a result of COVID-19 and is in direct response to a lack of lending by the large banks under the Business Finance Guarantee Scheme which was announced in March 2020.
The key features of the SBCS scheme are as follows:
The SBCS will be administered by IRD – This includes advancing funds to businesses and managing repayments;
All loan applications and subsequent correspondences will be processed through IRD’s myir online service;
Applications for the scheme will be open from 12 May 2020 to 12 June 2020 inclusive;
Eligible businesses must have 50 or fewer full-time-equivalent employees;
Eligible businesses must be viable;
Eligible businesses are entitled to a one-off loan with the maximum amount loaned being $10,000 plus $1,800 per full-time-equivalent employee;
Maximum loan amount is $100,000 however you do not have to take a loan for the full amount you are eligible for - You can elect to have a smaller loan;
Sole traders can receive a loan of up to $11,800;
Loan funds must be used to pay for core operating costs including but not limited to rent, insurance, utilities, supplier payments or rates.
You can only make one loan application and no amendments can be made after the loan has been applied for;
The annual interest rate will be 3% beginning from the date of the loan being provided – Interest does not compound so you pay a flat 3% per annum.
Interest will not be charged if the loan is fully paid back within one year.
Repayments are not required for the first 24 months;
Loans have a maximum term of 5 years.
50 or Fewer Employee’s
IRD will use information provided for your Wage Subsidy Scheme Application to assess this criteria or if you have not applied for the Wage Subsidy Scheme then you will need to provide them with information regarding the number of employees that the business has.
To determine the number of full-time-equivalent employees, IRD will divide the wage subsidy amount (that you received or would have received if you applied for the wage subsidy for all your employees) by $7,029.60 - the wage subsidy received for one full time employee. The result will be rounded up to the nearest full-time-equivalent employee.
If you received the Wage Subsidy for all of your employees, you are eligible for the SBCS loan if your wage subsidy was $351,480 or less. This equates to 50 full-time employees.
If you only received the Wage Subsidy for some of your employees or did not apply for the Wage Subsidy, you are eligible for the SBCS Loan if the amount of the Wage Subsidy that you would have received, if you had included all your employees, was $351,480 or less. You can work out what your Wage Subsidy would have been using the Wage Subsidy Eligibility Tool from business.govt.nz.
You do not need to have received the wage subsidy to receive a loan.
Your business must be viable
To be eligible for the SBCS loan your business needs to be viable and you must have a plan to ensure it remains viable. This generally means the Directors or Owners have good reason to believe it is more likely than not the business or organisation will be able to pay its debts as they fall due within the next 18 months. You should seek assistance from your accountant regarding your particular circumstances.
You must keep any evidence of the business’ ongoing viability at the time of requesting the loan, as IRD may audit your application. Evidence of business viability might include:
A cash-flow forecast for the business for the short term;
A business continuity plan detailing how you will mitigate the impacts of COVID-19 on your business;
A business recovery plan that has been updated to reflect the changed market conditions as a result of COVID-19.
A plan for where revenue will come from in future market conditions, and a forecast of those revenues.
Financial statements showing the business or organisation has enough resources to sustain itself when including the SBCS loan.
An assessment that the business or organisation is viable from your accountant.
Repayments
You will have 5 years (60 months) to pay off the loan. IRD’s usual repayment options will be available. Later this will include the ability to set up instalments.
During the loan period, the following general rules apply:
If you repay the loan in full within 1 year you won’t be charged any interest;
If you do not repay the loan in full within one year, you will be charged interest for the entire term of the loan;
Repayments are not compulsory in the first 24 months but you can make voluntary repayments throughout this period;
After 24 months, you will be required to make regular payments for both the principal and interest outstanding on the loan;
Applications for the SBCS Loans will require the following:
Provide your New Zealand Business Number (NZBN) - businesses without an NZBN will need to obtain one before applying for the loan.
Confirm your business is experiencing a minimum 30% decline in actual or predicted revenue from Jan 2020 to June 2020 as defined in the wage subsidy scheme.
Confirm your business existed before 1 April 2020.
Confirm your business is viable and ongoing, you have a plan to ensure it remains viable and ongoing, and you are keeping evidence IRD can use to check this.
Confirm you’ll use the loan to pay for core operating costs (including, but not limited to: rent, insurance, utilities, supplier payments, or rates).
Confirm the loan will not be passed through to the shareholders or owners of the business, for example, by a dividend or a loan to the shareholders or owners.
Confirm you have the appropriate authority to commit your business to this loan.
Confirm you are 18 years or over and have the legal right to apply for this loan.
Confirm you are aware IRD are not providing financial or other advice regarding this loan.
Agree to the loan terms.
If you have not yet applied for the wage subsidy, you’ll also need to provide your number of full-time and part-time employees.
Loan Conditions - Things to be aware of
Now that we’ve outlined the core features and requirements of the scheme, let’s talk about some of the specific conditions included in the 9 pages of Loan Terms and Conditions (version dated 9 May 2020) that you need to be aware of if you are going to apply for the SBCS Loans.
Interest
If you fail to meet the repayment obligations stipulated by IRD, interest will be charged at the rate of 3% plus the use-of-money Interest rate which is 7% from 8 May 2020 so your default interest rate will be 10% in this scenario.
Applicant undertakings
The applicant has to provide the following undertakings to IRD, that as long as there is an outstanding amount under the agreement that:
If you are not a natural person (ie company or trust) you must maintain an existence and registration in NZ;
If you are a natural person you must continue to be physically located and legally working in NZ (allowing for temporary absences);
You must promptly supply IRD with further information (including evidence and other materials) that they may reasonably request in connection with the loan or for the purposes of the loan contract;
You must promptly notify IRD if an event of default occurs or you cease to carry on the business for which the loan was provided.
You must comply with all obligations under the Wage Subsidy Scheme; and
You must comply with declarations, statements and undertakings made in respect of use of the loan amount and keeping of evidence, materials or other records required for audit purposes.
DEFAULT EVENTS
The following actions will be considered a default on the loan agreement and require immediate repayment of the outstanding loan amount:
Failure to meet amounts payable (as determined by IRD);
You breach any of the undertakings detailed above;
If it is found that any declaration or statement made in respect of the Loan Agreement or Wage Subsidy Scheme are found to be untrue, inaccurate or misleading;
You suspend making payments on any of your debts with a view to ceasing or restructuring your business (ie liquidation, de-registration or agreement with creditors);
You cease to carry on the business for which the loan amount was provided;
All of the assets for the business for which the Loan Amount was provided, are sold or transferred;
Potential ISSUES With SBCS Loans
BUSINESS RESTRUCTURING
The loan terms and conditions make it clear that if you attempt to restructure the business at any time while there is a balance outstanding on the loan that this will be a default event under the loan agreement and the outstanding balance on the loan will be repayable immediately.
At a time where there is a huge amount of uncertainty and significant financial strain is being put on businesses, the ability to restructure their business affairs could be critical in determining whether a business continues to be viable moving forward. The very tight timeframe for applications for the loans together with the uncertainty that continues regarding business operations moving forward means that it is not possible to address any necessary restructuring before applying for the SBCS Loans.
DEFAULT INTEREST RATE
The loan terms and conditions make it clear that if you fail to make any of the payments required by IRD or there is a default event that the default interest rate will apply. The default interest rate is the loan rate of 3% plus the use-of-money interest rate which is currently sitting at 7% so the interest rate that will apply is at least 10% and this will increase if the use-of-money interest rate is increased.
It’s also important to note that if the default interest rate is triggered that interest is then calculated on a compounding basis.
LOAN CONTRACT
You will be required to sign a loan contract and while we have reviewed the published terms and conditions for the scheme (dated 9 May 2020), due to the newness of the scheme we have not seen a full loan contract at this stage. Depending on the contents of these documents it may be in your best interests to ensure that you have this reviewed by a solicitor before signing the agreement.
The terms of the Loan Contract can be amended at any time and IRD only needs to provide you with a minimum of 30 days notice.
PROVISION OF INFORMATION
When you apply for the SBCS you agree that you will promptly supply IRD with further information (including evidence and other materials) that they may reasonably request in connection with the loan or for the purposes of the loan contract.
At this stage, we do not have details of what information IRD may require to satisfy this requirement, however in our view it is only prudent to supply IRD with information that must be provided and we tend to err on the side of caution and ensure we minimise the amount of information that IRD receives about specific client situations. All applicants will need to seriously consider whether they want to be in a position of having to provide IRD with a higher level of information, which may be used for other purposes, for what will be a relatively minimal saving in respect of interest costs.
APPLICATION PROCESS
The SBCS loan application must be completed by either a shareholder or director of the business who has authority to complete the application on behalf of the business. You must also complete the application using IRD’s myir online service so if you don’t have a myir account you will need to apply for one, get it in place and ensure that you have authority to act with IRD for the business before you can file an application for the SBCS loan.
Your accountant or other business advisers cannot complete the application on behalf of the business.
Overall Thoughts on SBCS
The Government has clearly launched this scheme in response to criticism regarding the lack of support available for businesses who are having to continue to meet overheads during the COVID-19 crisis together with difficulties being experienced when attempting to access funding available under the Business Finance Guarantee Scheme.
It does appear that the SBCS loans will be relatively easy to access if you received the Wage Subsidy and IRD are looking to expedite payment of the loans, where all requirements are met.
While the SCBS loans do seem to be less onerous in respect of loan security requirements, we feel that there are still enough potential fish hooks in the scheme to warrant a warning that if you are going to apply for the SCBS loan you need to ensure that you have done your homework (and have evidence and support that it is in place) regarding business viability and how you are going to operate moving forward. If you don’t you may find yourself in the position of having the loan being called for immediate repayment in full which could make a tough situation down the track even worse.
More information on the Small Business Cashflow Scheme can be found here on IRD’s website.