On 1 April the New Zealand Government, together with retail banks and the Reserve Bank announced the Business Finance Guarantee Scheme package for businesses affected by the COVID-19 pandemic
The Scheme will provide cover for up to $6.25 billion worth of loans to New Zealand businesses, enabling businesses with annual revenue between $250,000 and $80 million to apply to their banks. The Scheme will allow for loans of up to $500,000, up to a three-year term and will be subject to specific criteria (outlined below).
The key feature of the Scheme is that the Government is guaranteeing 80% of the risk of loans, while the bank covers the remaining 20%. While the risk of default of the loan is shared between the Government and the bank, businesses are still required to repay this loan.
The Scheme contains standard criteria for businesses to be eligible, otherwise a normal lending process will be followed by the banks. A number of banks have already put their application forms online, or provided specific telephone helplines so that you can contact them to discuss your needs.
- New Zealand-based business.
- Annual turnover of $250,000 to $80 million.
- Impacted by COVID-19, including by reviewing its trading position prior to the COVID-19 pandemic and its plan for when New Zealand returns to the 'new normal'.
- The purpose is to support operating expenses while a business deals with the disruption caused by COVID-19.
- Scheme loans are limited to a maximum term of three years; however, the exact terms of individual loans will be determined by each bank.
- A loan cannot be used:
- for capital assets / projects other than such expenditure incurred in the ordinary course which does not exceed 5% of the principal amount of the loan;
- to pay dividends or on-lending outside a borrower's guaranteeing group;
- to refinance existing debt that was incurred prior to 16 March 2020; or
- to fund excluded activities (outlined below).
Scheme loans cannot be made to fund any business engaged in:
- Property development and property investment.
- Agriculture (but for the avoidance of doubt, agriculture doesn't include horticulture, viticulture, aquaculture or services to agriculture).
- Recreational cannabis.
- Manufacture of cluster munitions civilian automatic, semi-automatic firearms, magazines or parts and anti-personnel mines.
- Manufacture or testing of nuclear explosive devices.
- Manufacture of tobacco.
- Processing of whale meat.
- Any other activity notified by the Crown to banks in writing, with effect from the date of that notification.
Considering an application
A number of banks have indicated that the Scheme is in addition to (and potentially a final option) to other options that banks are offering customers. We have already seen banks offering temporary overdrafts, repayment relief on loans and credit card facilities as well as other restructuring options and increased access to working capital.
We expect, as with any ordinary course lending, prospective borrowers will need to provide their bank with:
- up to date financial statements;
- the business' most recent tax return; and
- a budget and cash flow forecast, including the forecast impact of COVID-19.
It will be critical that, as with any lending made to a business, the business appreciates both the pros and cons of incurring additional debt. We expect that Scheme loans will still involve banks taking security over business assets, to the extent they do not already hold security. Banks may also require personal guarantees and mortgages over business owner's residential homes, at least in respect of the 20% not guaranteed by the Government.
How Wynn Williams can assist
Wynn Williams is willing to assist any client to assess whether it meets the qualifying criteria for the Scheme and arranging an application to its bank. The firm is also committed to assisting clients to explore all other options of funding that may be available, whether through their current bank or potential third parties.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.