Small Business Cashflow Loan Scheme: Do your homework first
A former economist at one of New Zealand’s largest banks has a warning for someone considering the Small Business Cashflow Loan Scheme: It could limit your future borrowing capacity.
That’s because banks may decline lending to anyone who has this type of debt on their books, as IRD may have first collection rights as a creditor if the applicant's business goes belly-up.
An overview of the scheme
Under the Small Business Cashflow Loan Scheme, the Government is offering interest-free loans of up to $100,000 to cover operating costs such as rent, insurance, utilities and supplier payments to those with 50 or fewer fulltime staff.
IRD will administer the loans. New section 7AA Tax Administration Act 1994 gives them the power to do so.
To be eligible, an applicant must show they have suffered a 30 percent reduction in revenue (à la the wage subsidy) and prove their business is viable.
The scheme will provide $10,000 to every business, plus $1800 for every fulltime employee.
For instance, a sole trader can borrow up to $11,800.
A company with 50 fulltime employees will get the full $100,000. That comprises the base loan of $10,000 and $90,000 for its staff.
The loan will be for a maximum of five years, with repayments not due in the first two years.
If a business pays the loan within the first year, no interest will apply. An interest rate of three percent applies otherwise from the start date of the loan.
Those utilising the scheme will enter a legally binding arrangement with IRD. You can find the terms and conditions of the contract here.
As at 9am on 22 May 2020, $824.516 million worth of loans had been approved and distributed to 47,664 applicants.
The scheme is available until 12 June 2020.
The implications of an IRD loan
Ex-BNZ economist Tony Alexander, speaking as part of TMNZ’s first virtual roadshow earlier this month, was asked his thoughts on the Small Business Cashflow Loan Scheme.
He says it’s important to remember it is not free money.
Anyone borrowing money from IRD should do so only to cover uncertain cashflow fluctuations over the next 12 months.
However, he has a warning for those looking to use the scheme. That is: What will your bank say the next time you approach them for core financing?
“If you do borrow [from IRD], and then you go to your bank and say you want to borrow money, they’re going to be factoring in that new debt which you have got there, debt which I’m guessing will rank higher when it comes to closing down the firm if necessary than lending to the bank,” says Alexander.
“I figured that’s why [the Government] did it through the IRD because they would have first call on the company in a closed down situation in advance of the bank, but I can’t be sure of that.”
Does IRD have priority?
Interestingly, IRD has amended the definition of ‘tax’ in various sections of the Tax Administration Act 1994 to include these loans. So yes, that gives them the necessary collection powers.
However, what is not certain is if these loans are a priority debt that move to near the front of the queue in the way that PAYE does when a business enters into liquidation.
We’re hoping Richard Owen, who is the small and medium enterprises customer segment lead at IRD, can clarify this at our next virtual roadshow on 17 June.
You can register for this event here.
Other things to note about Small Business Cashflow Loan Scheme
Below are the important terms and conditions of the scheme to note.
IRD calls the shots
IRD can change the terms of the loan contract with 30 days’ notice. It can also assign the loan to another party.
And they can audit your application at any time.
Beware the consequences of defaulting
In the case of an ‘event of default’, then the interest rate jumps to 10 percent.
This comprises the three percent someone normally faces under the scheme, plus IRD’s underpayment interest rate. The latter is currently seven percent.
At a time where the Government has stamped out loansharking, 10 percent interest is quite draconian.
An event of default can include someone:
- Breaching or not complying with any undertaking they are required to under the agreement they have with IRD.
- Failing to make payments of the loan due to the dissolution, termination, disestablishment, de-registration or winding up of a company.
- Failing to make payments of the loan due to the appointment of a liquidator, statutory manager, administrator, receiver, bankruptcy official or similar officer in respect to a person or any of their assets.
- Ceasing to carry on the business or organisation for which the loan amount was provided.
- Making any statement or providing information that is untrue, inaccurate or misleading.
See clause 9.1 of the terms and conditions document for more information about an event of default.
You will enter a payment plan after 24 months
Anyone who fails to pay their loan back within two years will put on an IRD payment plan.
From the date of the 24th month to the final repayment date (i.e. the date falling five years after the loan is made available to someone), a taxpayer must make regular instalment payments of principal and interest, as notified by the department.
Any such instalment payments will be calculated by IRD to spread the amount of the required repayments over this repayment period.
Failing to pay an instalment amount will trigger default interest.
You must remain in New Zealand
An individual borrowing money from IRD as part of the Small Business Cashflow Loan Scheme has a requirement to stay in New Zealand (other than for temporary absences like holidays) until they pay back their loan.
You must notify IRD of any changes
Anyone using the Small Business Cashflow Loan Scheme has an obligation to tell IRD if their company or organisation ceases to exist as soon as possible.
It is important you consider this if you are in self-employment.
After all, if you choose to put your business on hold and move back into an employment role, it may trigger a requirement to repay the loan.
IRD can share your information
The contract terms give IRD broad powers to share personal information with other government departments as well as debt collectors and credit agencies.
Do your homework first
We encourage anyone thinking about using the Small Business Cashflow Loan Scheme to read the terms and conditions, so they know exactly what they’re getting themselves into.
Moreover, take heed of Alexander’s warning about the impact it may have on getting a bank loan later.
However, above all else, seek expert advice about your situation before signing up to anything.
