$6.25b Business Finance Guarantee Scheme .... WILL NOT HELP

As the cash injection provided by the COVID-19 wage subsidy is being used up, businesses needing more cash will no doubt be searching for options.

Looking at the Business Finance Guarantee Scheme as a funding option for small medium businesses, and after speaking with other businesses and accounting firms throughout New Zealand, I doubt it will be much help for businesses or banks in its current form.

From a small medium business perspective, I cannot see why any business would use it:

• Funding is not provided for Capex or re-financing purposes – which doesn’t help businesses looking for re-financing options
• Application of funds is restricted to Opex – essentially paying wages and rent
• Lending security requirements appear to be the same – directors’ guarantees, personal guarantees, mortgage security. All this scheme offers is a secondary level of security for banks
• Particularly in these uncertain times, let no-one forget that it’s a loan. If there is any doubt about the borrower’s ability to repay, then lenders won’t lend and borrowers shouldn’t try to borrow

Banks can’t be accused of trying to hide who benefits from this scheme. Here is the original brutally honest wording from one of the main New Zealand bank websites:

“The Government guarantee is for the benefit of XXXX, not for the business borrowing the money. You do not benefit directly from this Government guarantee.

If you are unable to meet your repayment obligations:

• XXXX will first seek to recover 100% of any outstanding loan balance from you and any property given as security.
• If XXXX cannot recover 100% of the outstanding loan balance from you and any property or asset given as security, then the Government guarantee allows XXXX to recover up to 80% of the shortfall from the Government subject to it being satisfied that XXXX has met certain due diligence requirements. 

As with any other loan, any property given as security may be repossessed if you are unable to meet your repayment obligations. You should not apply for an amount that you cannot comfortably afford to repay now and in the future”

That was to the point! They certainly can’t be accused of a lack of transparency. It should be enough to put most businesses off even considering it. What it suggests is, forget it. Don’t bother with the Business Finance Guarantee Scheme.

If you want a business loan, given the current security requirements it is probably easier to just follow the normal business loan application process. The same security is required without a restriction on the application of funds.

So, unless I’m mistaken, the Business Finance Guarantee Scheme can fairly be summed up as offering banks an extra level of security without providing businesses with a new source of funds.

That seems to be a serious flaw at a time when businesses … NOT banks …. are running out of cash and desperately need greater liquidity.

This problem is not unique to Business Finance Guarantee Scheme. It would appear the equivalent Coronavirus Business Interruption Loan (CBIL) scheme in the UK was similarly flawed:

• Banks not cooperating with coronavirus loan, complain small businesses
• Apsco and REC highlight concerns over CBIL scheme
• Chancellor revisits CBIL scheme following recruitment industry lobbying
• Chancellor responds to business community and extends support package

Here is a summary of complaints about the UK banks’ treatment of the CBIL scheme. Challenges included:

• A lack of transparency around eligibility and the criteria applied.
• Disparate approaches taken by the banks, particularly on eligibility.
• Requirements for personal guarantees and extremely high rates of interest, despite the government-backed security.
• Sales techniques adopted to persuade customers to use other, non-government banked, forms of credit.

Consequently, there were calls for:

• Transparent, publicly available guidance to be issued by the British Business Bank directed at the banks, on applying discretion in decision making on eligibility, creditworthiness and appropriateness of the scheme to individual circumstances.
• Public, auditable and swift measurement of the banks' adherence to such guidance, giving credit for transparency, speed of processing of applications, numbers and value of loans provided under the scheme.

It took lobbying from UK industry bodies to get the Chancellor to change the rules to make loans more beneficial to businesses. Similarly, changes are needed to the Business Finance Guarantee Scheme to make it more helpful to the businesses that it is intended to support.

If the intention of the scheme is to support, encourage and give confidence to businesses to borrow money to retain staff, pay rent and other opex during these challenging times, the Business Finance Guarantee Scheme is failing.

As the scheme currently stands, it amounts to expecting already stressed business owners to give personal guarantees and mortgage their homes to provide 100% security for banks to lend the money needed to continue paying staff, rather than simply making them redundant to reduce costs.

Speaking as a baby-boomer business owner with 30-years’ experience under my belt, experience tells me that is not an attractive proposition.

What can be done to improve the scheme?

Without heaping even more pressure on already stressed business owners by requiring 100% personal security, why not simply reduce the business owners’ security requirement to 20% to personally mitigate the banks risk exposure?

In this scenario, government exposure to a slice of the economy that employs a significant proportion of the workforce, and needs serious support to continue doing so, would amount to approximately $5 billion.

With regards to banks in this or any scenario, they don’t want to see businesses fail. They want to help them survive. And they have a critically important part to play in helping businesses through these challenging times.

Provide support to businesses wanting to retain staff. Remove bank risk. Let banks get on with what they do well. Let them use their credit assessment experience and capability to decide which businesses receive funding under the Business Finance Guarantee Scheme.

Maybe I'm being very naïve. However, I do think this one change would significantly improve the helpfulness of the scheme, and provide good businesses with access to an important new source of funding at an extremely difficult and very stressful time.

If you have got this far, you probably have a similar level interest in the scheme that I do.

If you know someone in a high place who might be able to influence the right people to revisit this scheme, or small medium-sized business owners interested in the Business Finance Guarantee Scheme, feel free to share my views.

My message is “Be warned, don’t get your hopes up, this scheme in its current form is not going to help those who need it the most”.

Best of luck!

Bernie

SME business owner, Golden Bay, NZ