The small business cash flow loan scheme explained

Starting from 12 May 2020 until 12 June 2020, small businesses in NZ may be eligible to apply for a Small Business Cash Flow Loan Scheme (SBC) to help them maintain and support their business operations. So today that’s exactly what we will be discussing. A lot of the information is available on the IRD website so the purpose of this article is to summarise some of the key points, discuss whether you need the loan, talk about how you can use the loan and point you in the right general direction.

Ok without further ado,

Let’s get into it.

What is the SBC Loan?

The SBC Loan is the Small Business Cash Flow Loan Scheme – the latest in a series of measures instituted by the NZ government to support small businesses here in NZ (Yay!). It is very important to note that the SBC is a loan and NOT a grant. If you are thinking about applying for the SBC you first need to consider whether or not your business will be in a position to repay the loan in the future.

How much can I borrow from the SBC?

Each business will be given a flat $10,000 to start off with. This amount increases by $1,800 for every FTE (full-time equivalent) employee working in the business. The SBC loan is only for businesses with 50 or less FTEs – meaning that the maximum amount any one company can apply for is $10,000 + (50 X $1,800) = $100,000. 

Bear in mind that the owner of the business is considered to be an FTE. This means that if you are a sole trader you will get $10,000 + $1,800 = $11,800 from the SBC.

Let’s look at an example:

Tiara runs a catering business from home. She has no employees. She applies for the SBC and is eligible for a $10,000 plus $1,800 (counting herself as an employee) loan.

That being said, you can apply for a lower amount if you wish. The amounts shown in these calculations are the maximum amount that you can apply for.

The number of FTEs in a business is determined by the amount of wage subsidy you applied for divided by $7,029.60. You don’t need to worry about this though as this calculation will be done for you during the application process. If you haven’t applied for the wage subsidy – you need to provide proof of employment for the number of FTEs at your business.

What are the features of the loan like?

These are the key features of this loan:

• The loan is for a term of 5 years taken from the date of disbursement of the loan to the business. 
• Interest is only charged at 3% per annum. Non-compounding.
• If the entire loan is paid off within the first year, no interest will be charged.
• Repayments are not required within the first two years (24 months) of the loan BUT you can make voluntary repayments within this period and throughout the term of the loan.
• After 24 months, you will be required to make regular repayments on both the principal and the interest – this will be set up by IRD for you.

At 3% interest rate per annum which is non-compounding (meaning that the interest is not added back to the principal amount), you as will only be paying interest on the base principal that you borrowed. This alone makes the SBC significantly more competitive than existing small business loans on the market.

The fact that it is interest-free if paid off in the first year is also really good for businesses who just need a quick cash fix right now and will be in a position to pay off the loan within 12 months. 

That being said it is VERY important to note that if you don’t pay off the loan within 12 months – interest will STILL BE CHARGED on any amount outstanding by the end of the first year. 

What are the conditions and criteria for applying for the loan?

When making the loan application, you will need to provide the following (taken from the IRD Website):

• Provide your New Zealand Business Number (NZBN) – businesses and organisations without an NZBN will need to obtain one before applying for the loan. (Need a NZBN? – get one here)
• Confirm your business or organisation is experiencing a minimum 30% decline in actual or predicted revenue from Jan 2020 to June 2020 as defined in the wage subsidy scheme.
• Confirm your business or organisation existed before 1 April 2020.
• Confirm your business or organisation is viable and ongoing, you have a plan to ensure it remains viable and ongoing, and you are keeping evidence we can use to check this.
• Confirm you’ll use the loan to pay for core operating costs (including, but not limited to, rent, insurance, utilities, supplier payments, or rates).
• Confirm the loan will not be passed through to the shareholders or owners of the business or organisation, for example, by a dividend or a loan to the shareholders or owners.
• Confirm you have the appropriate authority to commit your business or organisation to this loan. ‘Tax agents, Bookkeepers, Nominated Persons and Other Representatives cannot apply for the loan on behalf of the person they are representing.’
• Confirm you are 18 years or over and have the legal right to apply for this loan.
• Confirm you are aware we are not providing financial or other advice regarding this loan.
• Agree to the loan terms.

The first three conditions are pretty self explanatory, especially if you have applied for the wage subsidy – so I won’t elaborate on them. As per the wage subsidy requirements, the 30% decline need only be for any ONE month between Jan and June 2020 (not all six months).

However, there are a few important points to note here regarding the other conditions –

First: You need to confirm that your business is viable and ongoing (I will discuss this later in the article). You do not need to provide evidence of this when making the application – but it is something you will want to keep handy when the authorities come around to audit you.

Second: The loan can only ever be used to pay for operating expenses. The loan also CANNOT be used for the owner’s personal expenses. This also implies that the loan cannot be used for capital expenditure or renovating/upgrading the business premises.

Third: Only owners, directors and executive officers of the company can apply for this loan on behalf of the business. Your accountant/tax advisor/lawyer/cuzzie/nana cannot apply for this loan on your behalf. So, nope – I can’t help you apply for it, you need to do it yourself.

What do I need to show to prove that my business is viable and ongoing?

Great question!

If you are a keen follower of this blog, you might already have the evidence you need in place. Essentially you need two things:

1. A business continuity plan that outlines how your business intends to operate and survive in the next 2 to 5 years. You will need to identify your revenue streams, outline your overall costs and talk about your strategy in the years to come.
2. A cash flow plan that outlines how you intend to spend your money, what sort of spending strategies you will use and how you will manage costs in your business.

To this end, any communication and documentation you have between you and your business coach, Regional Business Advisor, accountant and banker will be important in backing up your claim that your business is viable.

Don’t have a business continuity plan or a cash flow plan in place? Don’t have the time or resources to access a business coach? Fortunately for you I have just launched a new service called ‘1-day Business Boot Camp’ which is a combined, condensed and more affordable version of the business continuity planning and cash flow training services I already offer. Click on this link for more information.

Ok, that’s nice to know. But do I need the SBC loan?

Another great question!

The first question you need to ask yourself is: 

‘Do I expect my business to be viable enough to repay this loan within 5 years?’. 

I can’t answer this question for you. I can help advise you on the matter but this is a question you need to ask yourself.

Bear in mind that this loan is ONLY for covering operating costs – so if you feel like you have enough money to cover your operating costs, then you probably don’t need to apply for the loan. If you feel like you are struggling with paying your team, buying supplies and meeting rent obligations, then you probably should apply for the loan. But the flip-side is that if you are already struggling to run your business now, can you safely say that you will be able to pay off the loan in 5 years?

Sorry – no magical answers here. You will need to discuss your individual situation with a business coach and/or accountant for more specific advice.

How should I use the loan if I get approved for it?

Broadly speaking, there are three ways you could use it:

1. Use the loan to fund all of your operating expenses

This is the best and recommended way to utilise the loan. Use it to cover all your operating expenses for the next several months or so and when things get better, you can start repaying the loan. This method is simple, easy and straightforward.

2. Use your revenue and cash reserves to pay for operating expenses and keep the loan in a separate account as an emergency fund.

To pull this off, you will need to set up a separate bank account for the loan. This method works if you have some cash reserve on hand and are generating some decent sales revenue. You are unsure about the future but you have some cash to spare and the SBC loan will help give you some additional security for the future. 

You would continue paying your operating expenses out of your own funds, only dipping into the SBC loan money when your own funds get low. 

There are some advantages to this method. By doing so, you will be in a better position to pay off the loan on time (interest-free if you do it within 12 months) AND you also get the additional benefit of having a cash safety net to cover your operating expenses if you run out of cash in hand.

3. Use your revenue and cash reserves to expand and grow your business and use the loan to cover your operating expenses.

This one is a reasonably risky strategy. With your business revenue and cash reserves freed up thanks to the SBC loan, you could use your cash reserves to make some capital investments into the business – buy up some new assets, upgrade your premises or invest in some new business systems. From a business growth perspective – this is great, plus if your investments pay off, you will be generating wealth in the local economy which will contribute towards kicking in this recession right in the teeth!

That being said, if your investments don’t pay off in the long run, you run the risk of not being able to pay off the SBC loan because you’ve blown all your money on capital expenditure. So if you plan on going with this method, be very, VERY sure about the investments you are making and how they will generate additional revenue for your business which will help pay off your loan.

Whatever strategy you choose, you must ensure that you abide by the confirmation that you will use the SBC loan only for operating expenses and NOTHING ELSE.

Thanks! How can I apply for the SBC loan?

Applying for the SBC loan is easy. So easy that I’ve made a super easy guide to how you can do it right here.

Cool stuff Sam! Hey, I just got this super cool idea that with the SBC loan covering my business expenses, I can use my personal money to invest into awesome investments that will give me a return higher than 3% and I can make sweet arbitrage off of the SBC loan!

ARE YOU INSANE?

First of all – What you are talking about is unethical. If you are abusing the SBC loan for personal gain  – you are a horrible person. While this suggestion sounds similar to the last strategy discussed, the main difference is that you are not growing your business – you are trying to game the investment markets.

Secondly – all investment comes with risk. If your ‘awesome investment’ goes belly up within the next 5 years then you won’t be able to pay off your SBC loan even. The authorities would come after you and you would still be a horrible person.

Oh ok, I’ll be a good person then and not do that.

Awesome! 

By the end of the day, the SBC loan is here to help support small businesses – not to help you make a cheap buck at the expense of others. Use it well, use it wisely and most importantly, use it to help protect your business and grow our local economy!

Stay Positive!