Image: Small business loan

Small Business Cashflow Loan Scheme: Do your homework first

Image: Small business loan

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.

TMNZ virtual roadshow: Tony Alexander talks post-COVID-19 economic recovery

Image: Auckland CBD from above

The increase in New Zealand’s net debt to GDP ratio over the next four years is not the bogeyman some are making it out to be, nor will the Government necessarily have to increase taxes to pay off what they are borrowing.

That’s according to one of New Zealand’s leading and respected economists, Tony Alexander, who last week discussed a range of topics relating to the current and post-COVID-19 economic landscape as part of TMNZ’s first virtual roadshow for the year.

Image: Tony Alexander

The net debt to GDP ratio increase

The Budget shows New Zealand’s net debt to GDP ratio is forecast rise to 30.2 percent this year and peak at 53.6 percent in 2023.

This is up from 19 percent last year.

Unsurprisingly, this has led to concern in some quarters.

However, Alexander (pictured left) says it’s important to remember there is no permanent increase in the size of the Government’s spending as a proportion of the New Zealand economy.

“Some people may be looking at this as the Government spending a lot more. Yes, in the short term they are, but in about five years’ time the ratio of the Government’s spending to the size of our economy will pretty much be back to where it was [during the] last fiscal year.

“That gives me assurance that Grant Robertson does want to continue along the lines of finance ministers in New Zealand since the early 1990s of trying his best as possible to get good control over the quantity, and hopefully quality, of Government spending going forward.”

Alexander says that credit rating agency Standard & Poor’s believes New Zealand’s economic outlook is better than The Treasury is forecasting.

They are showing no signs of issuing a potential downgrade in the wake of the Budget, he says.

A peak net debt to GDP ratio of 53.6 percent is still lower than where other economies are at currently. Some are sitting as high as 110 percent.

“Even after all this, we’re still going to be in a very good position,” says Alexander.

Tax hikes not the only way to pay down debt

In terms of how the Government will go about reducing its level of debt, there is talk they may have to introduce new or increase existing taxes.

That's because its tax revenue is forecast to drop.

The Treasury expects tax revenues to fall from $86.5 billion for the year to June 2019 to $80.1 billion dollars for the year to June 2021. Over the period to June 2024, it expects tax revenue to be more than $15 billion lower net of the effect of the reduced GDP over the period.

However, Alexander believes it is possible for the Government to reduce its debt without tinkering with the tax system.

He bases this claim on past experiences.

For instance, Alexander cites successive National- and Labour-led administrations managing to decrease New Zealand’s net debt to GDP ratio from 55 percent in 1992 to just six percent in 2008 through controlled, responsible spending.

“New Zealand has an established record of good fiscal control under both Labour and National governments,” he says.

“My expectation is we will see the net debt to GDP ratio in New Zealand decreasing over an extended period, that it’ll be a gradual process and it will be able to be achieved with spending restraint, rather than whacking GST up to 20 percent or introducing a new 46 percent top marginal tax rate or that sort of thing.”

Increasing taxes in the future would also be counter-intuitive to the Government’s goal of trying to get people to spend money now, when confidence is low.

“If they did [raise tax], we would spend less in anticipation of higher taxes down the track.”

Hear more from Tony Alexander

The affable Alexander spoke at length about several different topics during his informative, wide-ranging session with TMNZ.

These include:

  • His thoughts on the Government’s Budget and The Treasury’s economic forecast.
  • How the New Zealand dollar will fare in the next 12 to 18 months.
  • Why the party is over for tourism and what the collapse of that industry might mean for regional New Zealand.
  • When he feels banks will resume lending again.
  • Why quantitative easing does not cause hyperinflation, but may push up asset market prices.
  • The chances of the Reserve Bank of New Zealand resorting to a negative official cash rate.
  • The outlook for the property market.

Trust us, this is one hour worth your time.

You can watch Alexander’s full webcast here.

Next virtual roadshow – register now

Richard Owen from IRD will be joining us as part of our next TMNZ virtual roadshow on Wednesday 17 June.

Owen is the small and medium enterprises customer segment lead at the department. He will cover tax policy on COVID-19 and the impact for IRD, tax agents and taxpayers.

If you have questions about the remission of UOMI, the carrying back of tax losses or the Small Business Cashflow Loan Scheme, then you won't want to miss this.

You can register here. Get in quick because spaces are going fast.