A two-week delay in signing off deeds for the Government’s Business Finance Guarantee scheme has been a major irritation for business owners
Frustration is growing around the Government’s loan guarantee scheme for businesses, but the National Party says businesspeople need more than just loans.
Capital has dried up for owners like Manish*, who owns a hotel on Auckland’s North Shore. He’s been unable to access the loans he needs through the Government’s scheme, or his bank.
“We tried to follow it with our bank and we tried really very hard to get a loan for this Covid-19 period,” he said.
Manish attempted to access the loan guarantee scheme after it was announced two weeks ago, but his bank told him nobody was having any success through it and he would be better off applying for a regular loan.
He hasn’t been successful on that front either.
Manish’s application was declined over his revenue projections – his old revenues sliced in half.
He was even unsuccessful in refinancing $150,000 on a loan that he had mostly repaid.
Manish said the problem was the bank estimated he would earn no money for the lockdown period and did not have any idea how revenues should be projected beyond that.
“What projection [should] we do? Nobody knows what is going to happen,” Manish said.
‘Open for business’
Finance Minister Grant Robertson told the Epidemic Response Select Committee this week that the Government’s Business Finance Guarantee Scheme (BFGS) became a reality two weeks after it was declared “open for business” .
Goldsmith said compensation should go beyond loans and wage subsidies for employees. He said many businesspeople did not want to take on an extra chunk of debt during uncertain times.
Especially if they didn’t know when they would be able to re-open, or what their future revenues might look like.
“[They say] look I’ve got zero revenue. Have for more than a month. Looks like I probably will for another month,” Goldsmith said.
“[They say] the offer to take more debt on – secured by personal guarantee – is not helpful and I don’t want it,” he said.
Goldsmith believed there was a “moral case” for businesses to get more government compensation, including assistance with commercial rents.
“There are substantial other parts of the economy. All the public servants, the teachers, the superannuitants … who aren’t facing any change in their income,” Goldsmith said.
“It’s not quite in the public works category of compensation, but I think the moral case is made when the Government decides to tell a section of the community that you cannot work and you cannot make a living for public health reasons,” he said.
Mixed results for loan guarantees
Internationally, government loan guarantee schemes are producing varied results.
On one end, the UK’s ‘Coronavirus Business Interruption Loans’ have been one of world’s poorest performers. The scheme is being redesigned only a month after it was rolled out.
Britain provided an 80 percent guarantee on loans of up to $10m in March, but it was downhill from there after it soon became apparent that there was little to differentiate the Government’s coronavirus loans from regular loans.
“I detect a slight sort of frustration from the Minister and the Governor of the Reserve Bank that banks should be lending more of this money out faster.”
The BBC reported banks had asked businesspeople to put their personal property up as security, then told them they would sell off those items before any Government guarantee kicked in. Later, the Financial Times reported that only 983 loans had been approved out of 130,000 enquiries.
Switzerland’s $34 billion scheme is on the other end of the spectrum, with $25b of that distributed during its first week.
Interest-free loans of up to 10 percent of a firm’s revenue were 100 percent underwritten by the Swiss government. Larger loans were 85 percent Government-backed with a 0.5 percent interest rate attached. Market rates applied to the remaining 15 percent backed by the banks.
Not surprisingly, Goldsmith was more in favour of the Swiss approach.
“I detect a slight sort of frustration from the Minister and the Governor of the Reserve Bank that banks should be lending more of this money out faster,” Goldsmith said.
“There seems to be a bit of tension between that and the Treasury which said ‘normal lending criteria’ apply and ‘goodness this is Government money and be careful with it’,” he said.
Treasury declared the BFGS scheme “open for business” on April 2. Robertson told the epidemic response committee on Tuesday that thousands of loans had been made under the scheme in the space of a few days, but the exact number hadn’t been fully collated yet.
Robertson said some people who had been declined for loans earlier should re-apply now that the BGFS was in place.
“The deeds for these were signed over the weekend,” Robertson said.
“While the banks have been in a position to be able to talk to people about the loans and effectively get themselves ready … it’s only been a short period of time in which the scheme itself has been fully operational,” he said.
Goldsmith said all agencies involved – Treasury, Government, and the Reserve Bank – had sent out mixed messages about the scheme.
He argued it wasn’t clear whether the BFGS was supposed to be carefully watched over by the banks, or pushed out on riskier terms at a time when future business revenues were uncertain and unprovable.
‘Frustration’ at delays
Auckland Chamber of Commerce CEO Michael Barnett said the two-week delay in signing off the BFGS had been a “frustration for business”.
“The banks have been more inclined to try and redirect the businesses to other products,” Barnett said.
New Zealand’s scheme is more similar in scope to Britain’s than Switzerland’s. BFGS loans are 80 percent guaranteed by the Government and made through the “normal lending process” of banks.
Financial adviser Graham Smith of Keyman Insurance said emphasis on ‘normal lending criteria’ was the real problem with the scheme.
Smith said banks had tightened up their lending criteria before the present crisis on the back of RBNZ restrictions to cool down the housing market.
He said even if criteria were loosened a notch now, it would still be quite tough for most to meet.
“The people who are managing to get additional funding, they’re having to put assets on the line that they might not have had to in the past,” Smith said.
Smith said before the pandemic, a restaurant owner might have been able to get a loan for his business without needing to use his house as security.
“Now the banks are saying we’ll loan you the money, but now we want full security over your house as well,” he said.
Smith said coronavirus-affected businesses also couldn’t meet normal debt service ratios because the lockdown had disrupted their ability to prove those revenues on paper.
“If you ask a travel agent what are you earning this month and what are you going to earn for the next three months the figures are going to be pretty ugly,” he said.
“So they won’t be able to get any normal support from the banks.”
Barnett said he hadn’t heard any feedback on the scheme after the deeds to set it up were signed. However, he noted that most small-to-medium sized enterprises would not be able to provide any additional security for them if needed.
“They have probably used every bit of guarantee that they’ve got,” Barnett said.
“So any further guarantees that are required by the acceptance of the loan would be a frustration to them,” he said.
‘Share the pain’
Goldsmith argued compensation need not be purely monetary. It could involve addressing issues like the payment of commercial rents for premises that could no longer be accessed under lockdown.
“Some sort of code of conduct on the [commercial] rent side to make it clear that there’s a broad expectation that the landlord and the tenant will share the pain,” Goldsmith said.
Barnett backed Goldsmith’s view and said he found it concerning that a Chamber of Commerce survey this week showed only 37 percent of businesses had reached an accommodation with their landlord.
Goldsmith said banks had made good profits during the good times and now needed to help businesses weather the bad times.
“I think everybody agrees with the broad principle that in a period of difficulty you would expect the banks to be playing their part in getting people through,” Goldsmith said.
“And if that means being less profitable this year then so be it,” he said.
*Manish requested his surname not be printed