Small firms struggling with the coronavirus pandemic will be able to get interest-free and low-interest loans of up to $100,000, under a new “small business cashflow scheme” announced by the Government.
Finance Minister Grant Robertson said it had become clear that the support banks were providing to small and medium-sized businesses was “not meeting their needs nor our expectations as a Government”.
He did not say how much he expected the loans would cost the Government, indicating that would depend on the take-up.
The Taxpayers’ Union lobby group said its “back-of-the-envelope” calculation was that small businesses could apply for $15 billion to $20b of loans, but Stuff’s calculation is that the number could not be more than about $7b.
A spokeswoman for Revenue Minister Stuart Nash would also not disclose whether any estimates of the likely value of loans or the cost of the scheme had been prepared for Cabinet, repeating only that those figures would be difficult to quantify.
The small business cashflow scheme will be administered by Inland Revenue and will be available to firms employing 50 staff or fewer, with applications opening on May 12.
The loans will be intended to meet businesses’ “immediate cashflow needs” and to meet their fixed costs.
The most companies can borrow will be $10,000 plus an additional $1800 for each full-time employee they have, so only firms employing 50 staff could apply for the maximum $100,000.
The loans will be free of interest if they are paid back within a year.
Otherwise, interest will be charged at 3 per cent annually up to the maximum total term of five years.
Repayments would not be required during the first two years, Robertson said.
The eligibility criteria will be the same as those for the wage subsidy scheme, meaning the loans will also be available to the self-employed, including sole traders, who will be able to borrow up to $11,800.
“Everyone who applies for a loan will have to declare that they are a viable business,” Robertson said.
“Obviously Inland Revenue has a lot of information about businesses so it makes it reasonably easy for people to do those investigations.”
Firms would have a month to apply for the loans from the opening date, but that deadline could be extended, he said.
Nash said the Government was targeting the scheme at businesses which had “a viable business but have been put in a position of not generating any revenue”.
The intention to establish the small business cashflow loan scheme was revealed in the Covid-19 (Taxation and Other Regulatory Urgent Measures) Bill that passed under urgency on Thursday.
But ministers did not reveal the details of what it would provide until Friday.
The tax bill states that the loans must be repaid, but an explanatory note in the legislation says that if a portion of a loan is converted into a “grant” that will not have adverse income-tax implications for the applicant.
That suggests the Government is expecting some amount of money lent by IR under the scheme not to be repaid and to be written off.
Robertson said the law change paving the way for the loan scheme was mistakenly included in the tax bill that was tabled in Parliament, due to an error by the Parliamentary Counsel Office.
National Party finance spokesman Paul Goldsmith said the Government would “of course” have some estimate of the value of the loans that it expected to be made under scheme and it should release that information.
Offering more narrowly-targeted grants would have been “a better direction” for the Government to take, he said.
“There are many businesses which will be wary about taking on more debt at the moment, no how cheap the money is, and what they need is first to come out of lockdown as quickly as possible.
“Secondly, there is a good argument for highly-targeted cash grants to those who are mostly directly affected.”
The fact the law change paving the way for the loan scheme had been mistakenly included in a bill and hence passed unscrutinised by MPs was “problematic”, Goldsmith said.
“What we are left with now is a desire to get some more clarity about what they are doing to ensure the right people get access to this money and that taxpayers’ dollars are being spent wisely.”
National Party economic development spokesman Todd McClay said all the new scheme would do was “take the debt that’s been accumulated over the past six weeks and move it sideways”.
“Australia provided instant cash flow grants to businesses across the ditch which has allowed many to keep operating.”
Auckland Chamber of Commerce chief executive Michael Barnett said he would have preferred grants rather than loans, but the loans scheme was welcome and “better late than never”.
“Cash flow is the biggest issue for the 500,000 small and medium enterprises locked down and locked out of their businesses during level 4,” he said.
“They have rents to pay and overheads that will not go away and the last thing they need to do is take on more debt, no matter how attractive the offer may seem.
“I would hope that Government will play a long game … and consider forgiving the debt to build recovery and confidence to revitalise the business to create and sustain employment in the community,” he said.
Wellington Chamber of Commerce chief executive John Milford said interest-free loans were the right support for the Government to offer.
“It’ll give businesses some breathing space as they plan for their recovery.”
Taxpayers Union chief executive Jordan Williams forecast the scheme would involve “big money” and said it would leave taxpayers exposed to “enormous financial risk”.
“Any business with any loan – say paying 15 per cent for finance on a vehicle – will be taking this money and shifting the risk onto the taxpayer.”
The small business cashflow loan scheme is separate to the Government’s business finance guarantee scheme under which the Government has agreed to guarantee up to $6.25b of regular bank lending to small businesses.
Unlike the loans offered by banks under the business finance guarantee scheme, the loans provided through Inland Revenue were a “100 per cent government lending scheme”, Robertson said.
But the Government would also amend the business finance guarantee scheme, removing the need for businesses to offer the Government security over those loans and to have drawn down all their other loan facilities before applying, he said.
The Bankers Association responded to Robertson’s comment that banks had not met the lending expectations of the Government by saying banks had lent $6.1b to businesses since the country went into lockdown on March 26.
“That’s lending outside the business finance guarantee scheme and it’s almost as much as the total lending limit under the scheme,” spokesman Philip van Dyk said.
He appeared to suggest the rules previously surrounding the business finance guarantee scheme had limited its uptake.
“We welcome Treasury simplifying their scheme rules, as a result of industry feedback.
“We hope this means more customers are able to participate in the scheme for their longer term needs,” he said.