The Government is offering to underwrite larger bank loans to businesses via its under-subscribed ‘Business Finance Guarantee Scheme’ (BFGS).
It’s increasing the cap on loans offered under the scheme 10-fold, from $500,000 to $5 million.
It’s also broadening the BFGS to enable businesses to use the loans for purposes beyond cashflow. They can now use the loans for "capital assets and projects related to responding to, or recovering from, the impacts of Covid-19". They can also re-finance up to 20% of their existing debt.
Larger businesses, with annual revenue of up to $200 million, are also eligible. This cap previously sat at $80 million.
And the Government is increasing the maximum term of loans from three years to five years.
If a business defaults on a loan under the BFGS, their bank will follow its normal process to recover the debt. If the debt can’t be recovered, the bank can claim 80% of any shortfall from the Crown.
By shifting the bulk of risk from the bank to the Crown, the purpose of the BFGS is to encourage the bank to lend more freely.
It’s ultimately a bank’s decision whether they lend to a business or not.
While the Government doesn't require the bank to take security, or for the borrower to provide a personal guarantee, the bank can still chose to do so.
RBNZ changes term lending facility
The Reserve Bank has been backing the BFGS by offering to lend banks money at the Official Cash Rate provided they on-lend these funds under the scheme.
Because the Government is increasing loan terms under the scheme, the Reserve Bank is likewise increasing the maximum term of its Term Lending Facility to five years.
Participating banks - ANZ, ASB, BNZ, Heartland Bank, Kiwibank, SBS Bank, TSB, Bank of China and Westpac - have only drawn down $27 million from this facility to date.
$150m lent under $6.25b scheme
Banks have only lent $150 million to 780 customers via the BFGS.
When Finance Minister Grant Robertson launched the scheme in March, when share markets were crashing, he expected businesses to borrow up to $6.25 billion.
The scheme faced issues, as it was announced on the fly before banks were ready to receive applications.
The eligibility criteria was also narrow, so had to be broadened in May to include agricultural businesses and smaller businesses. Robertson also did away with a requirement for banks to take security in some instances.
While Kiwibank Chief Customer Officer for Business, Quentin Quin, said "a whole lot" more customers would now qualify for the scheme, NZ Bankers' Association CEO Roger Beaumont said "uptake will ultimately be driven by demand from businesses".
Reserve Bank Deputy Governor Geoff Bascand last month noted there had been a "material decline in businesses’ demand for credit" (across the board, beyond the Business Finance Guarantee Scheme) over the first half of 2020.
"While demand for loans for working capital from small to medium businesses, corporates and sheep and beef farmers has increased, demand for credit for capital expenditure has fallen significantly," he said.
He casted doubt on the prospect on an immediate uptick, saying: "Businesses’ investment intentions have also fallen sharply, with increased uncertainty around the strength of future demand.
"Some apparent weakening of demand for credit may also reflect perceptions by businesses that credit would not be available or that terms have tightened."
Bascand has repeatedly urged banks to lend, to avoid adding a credit crunch to the economic crisis caused by Covid-19.
Small businesses most in need
Coming back to the BFGS, Treasury in March advised Robertson small businesses, not covered by the scheme, needed support more urgently.
“The pressures will generally emerge first in smaller firms, which have fewer pre-approved precautionary loan facilities. Larger corporates have more options and deeper banking relationships,” Treasury said.
“The banks still have capacity to provide support to their clients, notably large corporates that represent a good credit risk.”
Indeed, the uptake of the subsequently announced, Inland Revenue-run Small Business Cashflow Loan Scheme, which offers unsecured interest-free loans of up to $100,000 to small businesses, has been huge.
The BFGS is available until December 31.
See Treasury's website for more on the BFGS.
44 Comments
Yes but given Crown guarantee, Crown already owns it in default scenario. May as well provide incentive to uptake TLF, with 80% haircut.
I see what you are saying, just am of the mind they will funnel anything and everything into TLF at this stage before they move to term lending.
If we go back to the govt loan to Air NZ we can see the rough terms as follows...
"The loan facility will be provided in two tranches: one of $600m with an effective interest rate initially expected to be between 7 and 8 percent, and a second tranche of $300m with an effective interest rate expected at 9 percent."
So what are the terms of this scheme for individual smaller company borrowers ?
Anything less than a market driven interest rate means the tax payer is subsidizing a private companies shareholders. Subsidizing them to pay a dividend, to pay directors salaries etc. What they aren't doing is incentivizing them to keep staff, to keep down price inflation etc.
I'm not a fan at all of this policy. It's got the words clusterfk written all over it.
The loan facility provided to AIR was particularly onerous. Had the same facility been extended to SMEs under the same conditions, there would have been an uproar. What you seem to be missing is the "tax payer" is a shareholder of AIR whether they know it or not via Govt shareholding and /or NZSF.
A market driven interest rate would have been significantly lower than the one imposed by the Govt.
The criteria the first time round was so tight (ie - normal bank business lending - 2 years of cashflows, financials, clean creditors ledger etc etc) hardly anyone could pass the test. If you were on the verge of failure, you werent getting this, and have probably failed by now.
The big winners on the day - the banks - again.
Borrow at .025% (and maybe next year -0.25%) and on lend at say 4% to 5% for 5 years.
With 80% of any loss gov't guaranteed back of envelope numbers say even writing off a huge 20% of loans advanced will only impact the banks net interest rate profit by less than 1% so still hugely profitable for the banks and not even their money - they are just managers of the scheme.
mfd - My point is that if the banks can borrow at the OCR rate of 0.25 and they on lent the whole $6b available at say 4%-5% that even if they wrote 20% of the total debt off over 5 years with the gov't reimbursing 80% of any losses this scheme will add about $200m to the banks' bottom line. PER YEAR.
It'd be interesting and mostly informative if we had the perspective from an actual business owner. Most, if not all, of the comments seem to be coming from cloistered admin workers, protected in their their nice little employment bubbles. How many of the current jibberjabber brigade actually have skin in the game? Methinks sweet FA of you
I do. We've already considered the previous offer and rejected it, this doesn't change our view and probably won't for most viable businesses with sensible debt loadings and sound propositions. Those with weaker prospects will be the obvious target of Robbo's largesse but with cautious banks as gatekeepers I suspect the uptake will continue to be low. Our T/O is down by around 10% YOY but margin and free cash are both up due to sail trimming. A cheap money sugar hit could be nice for a while but risks spawning complacency. We prefer to continue with the disciplines including accelerated debt paydown and get in the best shape we can to position us for the longer term realities. Bank is keen to lend us more for expansion and we have been eying up a couple of struggling competitors but Robbo's underwrite will likely postpone acquisition opportunities for a bit.
You have it wrong middleman. Load up to the gills on debt (make sure you are a limited liability company), live the high life by puchasing company ferrari's and beach houses (business necessities of course) and paying yourself a massive salary and directors fee. Then fold in a years time and liquidate your assets for pennies on the dollar (i.e. sell to your wife who just happened to get most of your overblown salary as a gift) and claim insolvency. Government guarantees your loan via keyboard strokes from the RBNZ so bank doesn't care, you get a nice ferrari and a beach house. Easy peasy.
You would only be learning from the big boys, what is this ethical nonsense you are spewing above??
blobbles. Your cynical rant is so true. We have been caught a few times by Mark Bryers wannabes and despite strong credit control processes continue to be from time to time. We filter applicants carefully, monitor credit risk diligently and insure selected parts of our ledger to achieve a healthy spread of net debt. If debtors don't pass the underwriters criteria they don't get credit. The vast majority of tradies and small business owners are good buggers who strive to do the right thing but a few just get caught with some really bad luck. If they keep talking to us we can usually find a way though. It's the ones who go quiet that usually get belligerent and turn out to be the rare bad apples. Your Ferrari pricks who cynically plot to steal your money don't enjoy their ill gotten gains. They lead dead eyed soulless lives with the mark of cain forever on them.
Pretty much the same as above, as a business owner we actually have tightened up considerably and are in the best cash position versus debt that we have been ever. We wanted to take advantage of the original deal but the prospect of a personal guarantee was too onerous for us plus 500k wasn't really worth going through the hassle for. We will definitely be candidates for this new opportunity, but probably not because of covid, hopefully it will allow us to refinance in order to reduce our current interest rates, thus reduce costs, and actually start paying our staff more, and employ some more high calibre people.
We're in business as are several friends of ours across different industries. None of us are borrowing, all are in agreement that if things get tough we'll downsize, lay off and look at closing shop. One is in the hairdressing game, extremely successful business but wages are a huge overhead for them. After a few months of working pretty much for cashflow not profit they've said another or harder lock down and they'll close shop. Less profit but way cheaper to work from home... scissors and water doesn't get much cheaper than that to run a profitable home salon, enough to very comfortably support a family without the stress of wages, overheads, rent etc.
Had a friend a few years ago who ultimately had a successful business. Like me he initially struggled to get bank finance, but eventually worked through the issues. He told me once though, that he succeeded primarily because he was too stupid to realise he wasn't supposed to. He had a lot of people telling him why he couldn't do things, that he wasn't qualified, that he didn't know ...., and so on. But he never gave up. He said 90% of the 'expert' advice he received was either irrelevant or just plain wrong. The people he listened to the most were his customers or potential customer base. We used to have regular problem solving meetings, where we would just sit down and discuss the issues he was facing and identified possible solutions. He asked me once why i was doing it and what i wanted. My response - he was a friend, and regardless, i wanted to see him succeed, nothing more. I guess he did, after about 10 years he sold the business for a tidy sum.
We borrowed in the last round mostly due to me being very pessimistic about the post lock down future, and spreading the loss of zero sales in level 4 over a couple of years. As it turns out we are 20% ahead YTD, in a leisure related industry (although I am still pessimistic about the future). The loan also saved me a heap of interest on the overdraft at 8.5% vs the loan at 2.5%.
The banks don't want to lose 20% of a loan either. They'll keep their criteria tight and no help will be forthcoming for businesses that were viable before Covid and would be viable after Covid.
This scheme didn't work before. So the IRD loan scheme was introduced and it worked after a fashion. Small businesses that couldn't get loans to tide them over from their banks got $10,000 per employee. Not enough to cover the damage but in many cases enough to allow businesses to eke out an existence.
If the govt actually wants to stop the 'reset' then it should increase the amount able to be lent by the IRD to $30,000 per eligible business. Give the banks some competition rather than play this game of let's all pretend we're helping struggling businesses.
Actually help businesses by using what has worked before rather than tinkering with a scheme that didn't work.
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