By Gareth Vaughan
Minister for Small Business Stuart Nash is not ruling out the Covid-19 emergency Small Business Cashflow Loan Scheme, or a version of it, becoming a permanent fixture, but says a lot of work would need to be done if this was to happen.
"What I will say is that the Minister of Finance [Grant Robertson] and myself have had a preliminary discussion around this," Nash told interest.co.nz. "And obviously in the end the Minister of Finance is the one who would sign off on this policy, if not cabinet, and he has not said 'absolutely not'."
"So he has not closed the door on it. He is open to it, but it would need a lot of work. And we would need to really define the parameters to, not eliminate risk, but to provide some form of value proposition that small businesses would take this up over and above going to a bank, [and] also understanding the gap in the market that this was trying to fill," says Nash, adding he believes he does understand the gap.
In March Robertson announced the Business Finance Guarantee Scheme, through which the Government underwrites 80% of individual bank loans on lending worth up to $6.25 billion to small and medium sized enterprises (SMEs). On May 1 the scheme was tweaked with agricultural businesses, which had been excluded, included, and the requirement for a general security agreement under the scheme removed. However at the same time the Government also unveiled the Small Business Cashflow Loan Scheme through which firms with 50 or fewer full-time staff can borrow up to $100,000 of unsecured lending through a scheme that's administered by the Inland Revenue Department (IRD). The loans are interest free if they are repaid within a year. Thereafter an interest rate of 3% will be charged for a maximum term of five years, but repayments won’t be required for the first two years.
When announcing the Small Business Cashflow Loan Scheme, Robertson said the Business Finance Guarantee Scheme wasn’t meeting businesses' needs nor the Government's expectations. And businesses were complaining they were struggling to get loans under the scheme.
As of Monday, $86 million had been lent through the Business Finance Guarantee Scheme to 503 customers, according to the New Zealand Bankers' Association. At the same date, loans approved and disbursed through the Small Business Cashflow Loan Scheme totalled almost $1.218 billion, to 71,626 applicants with an average dollar value of loans approved of $16,998.33, IRD says.
What is IRD's role? And what about Kiwibank?
Nash notes that IRD "was not set up to be a bank," but has high praise for IRD staff describing them as "exceptional." Nash is also Minister of Revenue.
"The way that Inland Revenue stood this up in about two weeks was just phenomenal," he says.
"If it's going to be permanent in its current format then we've got to have a good question around what is the role of Inland Revenue. Obviously the primary role is to collect revenue for the Government, that goes without saying, But do we want to expand its mandate into being a bank or is there a better vehicle?"
"Obviously we [the Government] own Kiwibank but that has to operate under a commercial mandate. And so whether this [the Small Business Cashflow Loan Scheme] becomes permanent or morphs into something more aligned with the Canadian model, is something that I am very keen to explore. But no decisions have been made yet," says Nash.
Asked whether offering SME loans via Kiwibank, and potentially other banks, with some sort of government guarantee might be possible, Nash was sceptical.
"The Minister of Finance and the Government thought that we had sort of set this up when we went for the bank loan [business finance] guarantee scheme. And we thought they wouldn't operate a business as usual model and they would get money out the door really quickly ... As it turned out it didn't work out that way."
Nash says feedback he got was the process was too slow for SMEs needing immediate cash, banks wanted security, and banks were offering other types of loans.
"Banks were using customer contacts to really up-sell their own product and weren't selling the government's product in a way that we thought they were going to and meet our expectations," says Nash. "So if it was to be done through the banks then I think there would have to be some very, very serious conversations held."
The Government last week extended the deadline for applications for the Small Business Cashflow Loan Scheme to July 24 from June 12. Asked whether the deadline could be extended again, Nash says "never say no on that." The initial extension was made because "it was so successful," he says.
'Naive to say every business will pay their loan back'
Nash says there's no cap on the total amount of lending that could be done through the Small Business Cashflow Loan Scheme. Asked about the outlook for losses to the taxpayer from the scheme, Nash says "we always knew there were companies we give this money to that will fall over."
"I would be absolutely naive if I was to say to you that every single business that we've lent to is going to pay it back. We know that's not going to happen. We've always been clear we're not in the business of saving every single company. But what we have been clear about is we'll do our utmost to ensure that those that are viable have the best opportunity to survive. And that's what this is about," says Nash.
"And if firms borrow the money in good faith and then for some reason they fall over, that is the economic reality in which we are living."
"The political risk is at some point someone's going to say '15% or 20% of the companies that the government lent money to cannot pay it back therefore the government has lost this amount of money.' I look at it quite differently. If we'd given a whole lot of money as grants then people would've taken it because it was free money. In this case businesses had to take a good hard look at whether they needed the money and what they were going to spend it on. And they had to think about the level of uncertainty they were prepared to manage under, and the debt that they were prepared to take on, and make a conscious business decision. But if they don't make it through then that's the economic reality of a post Covid recovery economy."
The Australian government has offered small businesses grants in response to Covid-19.
If the Government ultimately moves ahead with a permanent version of the Small Business Cashflow Loan Scheme with the government as a banker, Nash says a good look will need to be taken at the parameters of such a loan scheme, including the potential for secured lending.
"But for me, doing what we're doing in terms of unsecured loans, is attractive for the 21st century environment," Nash says.
Twenty recommendations
Last year the Small Business Council, established by Nash to provide strategic advice on the small business sector, issued the New Zealand Small Business Strategy including a list of 20 recommendations. Nash says pre-Covid-19 there was a work programme in place working through the recommendations. These have included business friendly tax changes last year, and again this year. The Government also moved to speed up late payments to small business from big business and government departments.
Last December Nash announced access to finance for small businesses would be facilitated via a new online tool, Funding Explorer. This interactive resource, in partnership with banks and accountants, would help business owners identify the right finance options for their circumstances
"When Covid came along everything went out the window, but not in a bad way," Nash says.
Four of the Small Business Council recommendations related to finance and funding for SMEs, and the Covid-19 crisis has seen the introduction of the Small Business Cashflow Loan Scheme.
Meanwhile Nash says he wants New Zealand to be the most digitised small business country in the world. Because he chairs an OECD working group on digitalisation for SMEs, Nash says he has good oversight of what other countries are doing.
"I think we have a chance to be the leader in digitising our small business," Nash says, including the agriculture sector and tradies, by making good use of data generated by the businesses themselves. Nash is also enthusiastic about the opportunities open banking could offer SMEs.
According to the Ministry of Business, Innovation & Employment, Statistics New Zealand data shows businesses with less than 20 employees account for:
- 97% (487,602) of all enterprises
- 29% (599,880) of all employees
- an estimated 26% of New Zealand’s Gross Domestic Product.
*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.
12 Comments
If we really want to encourage business to grow and flourish we need to reduce the tax burden on them. Currently we have one of the highest business taxes in the world at 28%.
Most countries have much better corporate tax rates to allow growth: UK 19%, US 21%, Sweden 21%, Singapore 17%, Hong Kong 16.5%, Germany 15%.
I would recommend 19% for most business with the exception of any business to do with property should remain at the current tax rate. So Real Estate Agents, Letting Agents, Landlords etc, should remain at 28%. The reason why is because the property market agents distorted our economy far too much and that needs to re-balance.
I own a business that could apply for such an emergency loan. Extending these loans beyond CV is a terrible idea.
Helping businesses cope with a temporary shock, yes.
Supporting loss-making businesses indefinitely with tax payer $ is a really stupid idea.
I hate this nanny state where no one is allowed to fail anymore, there is no accountability left and no freedom left cause the government will take care of everyone. Well, some businesses do well some don't, that's the nature of business, propping up loss making businesses is unfair on the working class who pay for them and helping a business that is doomed only encourages poor management.
It's a terrible idea
Sounds right.
But what do we do with the, say, 1,000,000 unemployed New Zealanders whilst the economy adjusts? Because it could be that number as 'businesses that need to fail' do, and drag down others that depend on them - domino stuff.
Years ago, I asked a colleague in Tokyo "Why is do you need a staff member on every floor to greet you as the lift door opens?" and his reply was "It gives them a job. Without it, what else would they do?"
Societies provide for those who can't provide for themselves at different times. Maybe this is our way of staffing the lifts?
I suspect those numbers are Treasury officials giving worse case estimates, sitting in closets trying to scare each other the most with "what if" scenarios. That would be something like 37% unemployment, highly unlikely.
Someone told me not long ago that society and the economy by extension is a self regulating system that will adapt to it's circumstances. Well if that's the case, let it adapt. Stopping it from adapting is going to be severely detrimental long term because we will end up with a whole bunch of non productive zombie companies. If you hadn't noticed, the Japanese economic situation of the last 30-40 years is not something we should aspire to imitate.
What we are witnessing here and around the world has to be recognised, it is clearly: the death of capitalism. There is no need to be competitive or productive anymore, because if you aren't, the tax payer will bail you out. Many around the world are using the words in this article "indefinitely", which means "indefinite bailouts" which quickly have become "indefinite bail ins". They aren't even pretending to stop at making businesses get back to zero, they are giving them even more cash so they are cash positive again, despite having no income or customers. This introduces massive moral hazard, I don't have to run a company that is profitable or that even has customers, because my income comes directly from government handouts.
And I keep reading articles like this where every government is comparing their schemes and saying "well that country over there is doing a bit more than us, so we are going to do a bit more than them, because they must be wise enough to know that their policy doesn't result in moral hazard". It's a shocking race to the bottom with governments mired in group think, caught up in failing economic and monetary policy.
That might sound dramatic and over the top to many, but it is exactly what is happening. We are quickly going onto full printed money life support and we are STILL going to have a recession. Which means the actions of the governments are collectively doing nothing and are just blowing up the problem to be one concentrated in financial markets to be one that results in huge social tensions resulting in the break down of order. If it continues, revolutions aren't far away.
Right blobbles, spot on. Not taking any personal responsibility leads to big governmental parenting that never lets the kids grow up. Socialism in a word. Too much kindness can kill. Let the children grow up.
But I like the idea of the BIRD. The Bank of the Inland Revenue Department. Turning these dudes into a bank has merit. Perhaps when all these (our) businesses eventually fall over, as surely must happen, then the BIRD can catch up with these individuals down the track somewhere & remind them of their past failings & perhaps even catch up with some of their outstandings in the future? They've got the systems to do it. Some argue they're already doing it. We're mostly sick of the big Aussie banks behaviour anyway. Go the BIRD.
Just let my company have access to low interest loans for equipment to make us more efficient - Robots, lasers, presses. Without having to provide and arm and a leg (your personal home) to the bank as security.
But make it available for manufacturing industry only.
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