Interest Free Loan Scheme – a counter view

Thinking of taking up the Government’s interest free loan scheme?  This is a counter view from Tony Alexander, Economist, Bank of New Zealand:

“Last Friday, the Finance Minister announced a new lending scheme to partially bypass the one they had already set up with the banks.

By applying through IRD, businesses with up to 50 employees can get a loan of $10,000 plus $1,800 for each employee for a term out to a maximum of five years. Repayments will not be required before year 3 and the first year will be interest free. By the looks of it no security will be demanded, however businesses will have to sign off that they are financially viable, and being a debt through the IRD I imagine it will legally rank right at the top when it comes to company receivership.

In this way the Government has reacted to perhaps some unwillingness by banks to advance the finance which people were seeking, and has effectively punished them by ranking the new debt above the banks’. The Government has however removed their requirement for full securing of new debt under the BFGS, so that is a positive move.

The new lending scheme will assist the working capital requirements of firms and be just another small means of mitigating the economic damage underway and yet to come.

But before you jump in boots and all seeking up to $100,000 at zero then only 3% interest for up to five years, ask yourself this. What will your bank say the next time you approach them for core financing?

They will learn that you have up to $100,000 plus interest in debt to the government via the IRD. They will take that amount and the ranking of that debt into account when you apply for funding – and they may decline your new application.

So, don’t sign up to the new loan scheme thinking it will make things easy sailing. You will be reducing your future borrowing capacity.”

While the Small Business Cashflow Scheme may seem appealing during these times, it is important you are aware of the implications to your business of taking out such a loan.  This is particularly so if you already have a loan, an overdraft or a hire purchase agreement in place.

Source:  Tony’s View:  Thursday 7 May 2020