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.
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.
A sudden slip into Alert Level Three, the blast of the emergency ‘COVID’ warning through our phones and once again we’re into the balancing act of keeping our businesses moving in exceptional circumstances.
Last month our Pulse Check results told us how adaptable and flexible New Zealand’s small business are, with business owners altering operations and changing practice in order to survive the challenges that 2020 has thrown at us all. Just as we have rolled out our August Pulse Check – which you can access here if you would like to participate – the beat has changed again and, in Auckland, we are facing at least three days at Level 3, probably more, with the rest of New Zealand parked up at Level 2 for the time being.
We asked our Auckland team for their thoughts on the current situation and their advice was simple — we’ve been here before, rely on past experience and know that it will pass.
The Alternative Board’s managing director Stephen James said: “Knowing it will pass, spend some time addressing a few scenarios. For example, if Level 3 lasts, as announced, for three days what do you need to do? Or, if it remains in place for two weeks or if Level 4 is declared and we have full lockdown for an indefinite period — what then? Develop plans of action for each scenario and communicate these to your staff and stakeholders.”
It’s been dubbed ‘bigger than the Great Depression’ and daily news of redundancies and restructures highlight we’re in difficult times but we’ve weathered challenging economic situations before – so how can we learn from the past and prepare for the future?
Ten years ago, Harvard University published research into the way companies respond to economic crisis and how their actions ultimately determine shareholder value in the future. Covering three recessions – 1980, 1990 and 2000 – researchers found that 17% of the nearly 5000 businesses studied simply didn’t survive. Those that did survive were slow to recover and three years on from the recession hadn’t regained their pre-recession growth rates for sales and profits. Only a small number – 9% – flourished and the winners were not as expected. Those that won through adversity were those with a multi-faceted strategy able to master the delicate balance between selectively reducing costs to survive and investing for the future, spending on marketing, new assets, research and development.
Researchers classified the companies and their responses into four groups:
Prevention-focused companies, which make primarily defensive moves and are more concerned than their rivals with avoiding losses and minimizing downside risks.
Promotion-focused companies, which invest more in offensive moves that provide upside benefits than their peers do.
Pragmatic companies, which combine defensive and offensive moves.
Progressive companies, which deploy the optimal combination of defence and offense.
Getting the balance right, being a ‘progressive company’ is a challenge we all face right now, particularly given the effects of recession are not felt for some time – for example, the depth of the 1987 recession was felt in 1991. So best practice means being prepared for the next waves as they come through.
So what does best practice look like? Here are some steps that can help:
Continue monthly /quarterly rolling cashflow forecasts
Preserve liquidity so you have two to three months working capital
Regularly forecast sales so you can identify trigger points for actions
Use a financial model to calculate
Sales by category or division
Gross margin before labour by same
Direct and indirect Labour
Your breakeven under a best / worst / likely scenarios.
Note your breakeven can be quickly adjusted to a percentage of sales e.g. 10% target.
The model below determines your monthly salary cap. Determining your salary cap is the best way to achieve your required labour productivity and, for simplicity of explanation, I have used an annual example.
Assume revenue of $1 million and a net profit goal of 10% or $100,000
Assume also, we have non-salary costs (costs of goods sold $200,000 and overheads of $200,000) i.e. a total of $400,000.
We can now determine a salary cap of $500,000 in order to still achieve our net profit goal of $100,000 or 10% at this revenue.
It doesn’t matter if your employees are part-time or full-time. You have a $500,000 salary cap. It doesn’t matter if you give incentive pay or hourly pay. The sum of all salaries & wages at the end of the year cannot exceed $500,000. It’s no more complex than that. On a monthly basis, this is $41,666.67.
Being able to respond to economic challenges takes some flexibility – for some years now, agile working has been signaled as a good way to operate but what does that mean for day-to-day operations? For the most part, it means continually reassessing your position – what matters most? Next, stay vigilant, inspect and take stock of your numbers. Work on your strategy – what choices are there, how can you improve your value proposition, what will you do to inspire your team? Finally – agile means getting on with the job. Executing and implementing the plan as you adjust it and often this is the hardest piece of the puzzle.
We may find ourselves in a great recession but with some forward thinking, agility and an adherence to best practice it is possible to come out the other side and flourish.