The Government has developed a Small Business Cashflow Loan Scheme (SBCLS) to support small businesses that have been impacted by COVID-19.
This loan scheme has been in place since the March 2020 level 4 lockdown. Loan applications are open until 31 December 2023.
What is the eligibility criteria?
In order to be eligible for the loan a business must meet the following criteria:
- has 50 or fewer full-time equivalent employees. Commonly-owned businesses and organisations are treated as single employers when determining if this test is met.
- the business must be viable and must have a plan to ensure it remains viable.
- the business has had at least a 30% decline in actual revenue over a 14-day period in the 6 months before applying, compared with the same 14-day period one year ago, and the decline is due to the impact of COVID-19. If the same period one year ago was also affected by COVID-19, then you compare it against the same 14-day period two years ago. If the business was not in existence one year ago, or two years ago as the case may be, then you compare the revenue with the same or similar period in the previous month.
- the business must have been in operation, and you need to have owned the business, for at least 6 months before making the application
How do you determine if a business is viable?
Inland Revenue states a business is viable if there is good reason to believe it is more likely than not the business will be able to pay its debts as they fall due over the next 18 months. A business must keep evidence of the fact it is viable in the event an audit is undertaken.
What should a borrower consider before applying for the loan?
A borrower should speak with their lawyer to understand their legal obligations in taking out a loan.
A borrower should speak with their existing financiers to ensure that taking out the loan will not breach any terms or conditions of existing borrowings.
A borrower should also speak with their McIntyre Dick adviser to ensure the business is viable. Inland Revenue expects the evidence to support the viability of the business, therefore, it may require forecasts to be prepared for the business to confirm this.
It must be remembered that at the end of the day this is a loan and it needs to be repaid. A borrower needs to consider whether the business will make sufficient profits going forward in order to make the required loan repayments.
How much can be borrowed?
A business can only apply for the loan once and once the application has been made no amendments can be made.
The maximum loan a business can apply for is $10,000 plus $1,800 per full-time equivalent (FTE) employee.
An employee working 20 hours or more per week is considered full-time and counts as 1 FTE. For those employees who work less than 20 hours per week, are considered part-time and count as 0.6 FTE. The sum of a business’ FTEs is rounded up to the nearest whole number.
It is possible for a business to request a loan amount less than the maximum loan available.
Inland Revenue advises loans will be received as a lump-sum amount within 5 working days of making an application.
What can the loan be used for?
The loan can only be used to pay for core operating costs, including, but not limited to, rent, insurance, utilities, supplier payments, or rates.
The loan cannot be passed onto the owners of the business by way of dividends, loans, drawings, or otherwise.
What is the term of the loan and what repayments are required to be made?
The term of the loan is a maximum of 5 years.
Loan repayments are not compulsory in the first 24 months but voluntary repayments can be made. However, there is no ability to re-draw any voluntary repayments made.
After 24 months, regular payments of principal and interest are required to be made. Inland Revenue advises it will calculate these repayments over a 3 year period.
Any repayments are firstly applied against accrued interest then principal.
If there is an Event of Default then the borrower must repay the loan immediately.
What interest rate is charged?
The loan is interest-free if it is repaid in full within 2 years of the loan being made available, as long as the repayment is not due to an Event of Default.
Otherwise the interest rate is 3% per annum with interest accruing daily, but not compounding, and is charged for the entire term of the loan.
If an amount is not paid by a due date, or there is an Event of Default and the loan is not repaid immediately, then the default interest rate will apply. The default interest rate is equal to Inland Revenue’s use of money interest rate (currently 7%).
What representations need to be made by the borrower?
When applying for the loan a borrower makes the following representations:
- all information provided in connection with the application for the loan and wage subsidy is true and accurate and not misleading
- the person making the application has the authority and power to do so
- if a non-natural person, the business is registered and existing under the laws of NZ and the board or committee has been correctly and validly appointed
- if a natural person, the person has full mental capacity, is not a minor and is physically located and legally working in NZ
- no action has been taken for or with a view to dissolving, terminating, disestablishing, deregistering, or winding up the business or appointing a liquidator, receiver, statutory manager, administrator or bankruptcy official
- if trustees of a trust, no trustee has not lost, limited or prejudiced their right to be reimbursed from trust property
- the loan will not breach any other agreement or instrument binding upon the borrower or any assets of the borrower
- the obligations under the loan are legal, valid, binding and enforceable against the borrower
- no Event of Default is expected to result from the making of the loan
What undertakings does the borrower take on?
When applying for the loan the borrower accepts the following undertakings:
- for non-natural persons, the business will maintain its existence and registration in NZ and will not relocate outside NZ
- if a natural person, they will continue to be physically located and legally working in NZ
- to do everything to comply with the obligations under the loan
- to supply Inland Revenue with any information they may request
- to notify Inland Revenue of any Event of Default or if the borrower ceases to carry on the business for which the loan was provided
- to comply with all obligations under the wage scheme
- to comply with all declarations, statements, and undertakings made in respect of the loan
What is an Event of Default?
An Event of Default occurs in the following situations and will, generally, require the loan to be repaid immediately in full:
- an amount payable under the loan is not paid by the due date
- a breach of any undertaking
- providing untrue, inaccurate, or misleading information in connection with the loan
- the borrower suspends making payments on any debt owed, or any action is taken for or with a view to
o dissolving, terminating, disestablishing, deregistering, or winding up the business
o appointing a liquidator, receiver, statutory manager, administrator, or bankruptcy official
o rescheduling or moratorium of the borrower’s indebtedness
o a composition or general assignment with or for the benefit of the borrower’s creditors
o the borrower ceases to carry on the business for which the loan was provided
o substantially all assets of the borrower’s business for which the loan was provided are sold or transferred
Is there any limitation of liability for an independent trustee in applying for a loan?
The liability of an independent trustee for the loan is limited to the assets of the trust. However, this does not apply if the independent trustee loses their right to be indemnified out of the trust property, or diminishes the trust property through fraud or wilful breach of trust.
How do you apply for the loan?
Currently, only the borrower or someone who holds a power of attorney for the borrower can apply for the loan through the borrower’s MyIR account. It is not possible for McIntyre Dick to apply for this loan on your behalf.
What if I need assistance in applying for this loan?
We recognise that this is a very stressful time for business. Therefore, as a show of support to our clients, we will not be charging for any advice, support, or assistance provided in relation to the SBCLS and other Government support packages.
If you need assistance in determining whether you are eligible for this loan, whether your business is viable, or completing the application, then please email us at firstname.lastname@example.org.
Armed with an extensive knowledge bank, Brad specialises in providing taxation services to clients in the corporate, business, and rural sectors. He also has a keen interest in valuation, asset protection, and estate planning matters.