Gordon Stuart takes a look at the recent changes made to the government’s Business Finance Guarantee Scheme.
The eligibility criteria for a Business Finance Guarantee Scheme (BFGS) loan have been loosened from the initial terms detailed back in April. The maximum amount of the loan is now up to $5m. Note the first version announced by the Government in April provided $6.25b but was largely unsuccessful with only $150m taken up by 780 customers.
The BFGS loan use criteria have been widened, so your business (which can be a company, sole trader, partnership or trust) can use credit for (a) working capital (b) funding capital assets and/or (c) projects related to responding to, or recovering from, the impacts of COVID-19. Previously it was for working capital only.
I expect take up will be better this time towards the end of the year, as forecasting hopefully becomes easier.
Recessions since 1987 have generally reduced business revenues and cash available for debt servicing. This has resulted in longer debt payback thereby creating term debt needs.
To be eligible to apply for a BFGS loan your business must:
- Be a New Zealand based business
- Have annual revenue of $200 million or less in its most recently completed financial year
- Not be on your bank’s credit watchlist as at 31 January 2020 (for retail customers) or 30 September 2019 (for non-retail customers)
- Not be a residential or commercial property developer or investor, or a local authority or council-controlled organisation
The Participating banks ANZ, ASB, BNZ, Heartland Bank, Kiwibank, SBS Bank, TSB, Bank of China and Westpac are under pressure from the Reserve Bank to lend to their capped amount. However, their requirements for financial forecasts will still be tough. The better the quality of information you submit, the higher the likely success rate and the quicker the loans can be processed.
Here are some key points worth noting:
- Under the scheme, the government will guarantee 80% of the risk associated with eligible loans.
- The interest rate charged is lower, reflecting the Government’s 80% share of risk and should be (c.2.5% – 3%), up to 5 years and up to $5m. For Regulatory Capital Purposes the Government is zero risk weighted. The benefit borrowers receive is a lower interest rate.
- If your business defaults, your 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. Note that the Government guarantee does not limit your business’s liability for the debt
- For borrowers that have fixed rate lending already in place, consider break costs if you refinance existing fixed rate debt via a BFGS loan early.
- The BFGS loan needs to be repaid over 5 years but can be repaid earlier at no break cost.
- This scheme is also available to clients who are already on COVID-19 relief packages provided by the banks or have received the wage subsidy
- The Scheme is open for applications until 31 December 2020.
- Cannot be on the bank’s credit watch-list at 30 September 2019 and 31 January 2020.
- Cannot be a residential or commercial property developer or investor or a local authority or council-controlled organisation.
- Cannot be used to fund dividends – note:- there is a guaranteeing group exclusion that you should discuss with your Bank.
- Cannot be on lent outside the business.
- Cannot re-finance or repay more than 20% of the business’s existing term debt (term debt only). Note – there appears to be an exclusion if debt facilities mature before 31 December 2020. Discuss with your bank.
Note:- Businesses do not have to draw down all existing facilities before applying for a BFGS loan as previously required in April.
As part of your bank’s approval process for a loan under the scheme, your bank decides:
- The loan amount (up to $5 million under one or more loans), term (up to five years) and the interest rate
- What businesses should provide to demonstrate ability to repay the debt, such as a cashflow forecast, business plan and details of assets
- Whether it will rely on existing or require new security and guarantees to support the debt (this is not a Government requirement)
- Whether it will approve or decline a loan under the scheme.
Finally to reiterate two common misunderstandings.
- Is the Government guaranteeing the loan?
No. You will need to provide security for the loan as you would normally. The Government and participating banks have agreed to share the risk in case of default only.
- What kind of security do I need to provide for the loan?
While banks remain in control of their own lending decisions there is no Government expectation or requirement that lending requires a general security agreement or personal guarantee. Note – Banks will require security! Their job is to take minimal or no risk for maximum return.