20 May 2020

Did someone say free loan??

There’s an old adage that says “don’t look a gift horse in the mouth”. This does not apply to the latest small business loan scheme from Government – this is a loan, not a gift. The COVID-19 Small Business Cash Flow Loan Scheme, (or SBCS for the shorter tongue-twisting acronym), is a one-off loan for up to five years for SME’s adversely impacted by COVID-19.

The guts of it:

  • Check if you’re eligible here. The questions here are important when considering the terms of the loan so give them appropriate thought.
  • If it looks like you are eligible, then you’re up for $10,000 plus $1,800 per full-time equivalent employee. The loan is for core operating costs, (think rent, insurance, supplier payments etc). There are caps and limits around this but that’s the gist of it.
  • The interest rate is 3.00% per annum from the date the funds are provided, unless you:
    • Repay the loan, in full, within one year. In this case, the loan is interest free.
    • Default on the loan. In this case, the interest rate is 10.00%. This is calculated as 3.00% plus the Inland Revenue use of money interest rate, currently 7.00%.
  • Repayments are required to be made after two years and repayment in full, including any interest, is required within five years.
  • During the repayment period above, instalment payments will be calculated by Government and advised to you
  • No amount repaid can be re-borrowed.

0% vs 10% interest is huge! What’s considered a “default”?

  • failing to make repayments as required
  • failing to comply with the wage subsidy agreement (if you applied)
  • You close your business
  • sale/transfer of your assets out of the business
  • You pass the loan funds on to the shareholders for personal purposes

So, should you grab it with both hands?

This comes down to your unique business position and we think it should be carefully considered. The purpose of the loan scheme is to help businesses meet their core operating costs so if you take the loan for your business, you’ll need to have a need for it, other than eyes on a shiny new toy. We see three outcomes:

  1. You need it
    • Things are tight and you’re contemplating asking the bank for an overdraft increase or short-term loan. Alternatively, you’re already in overdraft or have a flexible loan account that allows you to make repayments without penalty. Given the harsh default rates, it’s important to forecast, as best as possible, to align the debt with your costs and your repayment ability.
  2. You might need it, soon
    • You have until the 12th of June 2020 to apply so don’t rush – we are in rapidly changing times. Spend time analysing your cash needs so you have a good handle on your position including where, when and for how long you might need help. Act when you need to.
  3. You don’t need it, but would like the cash
    • Who wouldn’t like a bit of free money?! It’s no lolly scramble though, run the numbers – to gain a truly interest free loan, you’ll have the money for a maximum of 1 year at a ‘risk-free’ savings rate of maybe 2%, less any fees and your time… It’s probably not worth the hassle!

The final step

In all options where you are seeking funding, consider your options, talk to your bank, accountant and industry peers. Money is as cheap as it has ever been and there’s much more to consider than just the interest rate in the window – things such as repayment period, security and guarantees are all important factors.

In any case, we’re here to help you, so get in contact with us. If you’re ready to apply for the Small Business Cash Flow Loan scheme, the application is here.

Want to know what other businesses are doing in regard to their cash flow? Check out what Chris Bagley thought in our latest episode of Owner Insights.

Your Outside team and Ruby