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Covid-19 has undoubtedly brought many challenges to small and medium-sized enterprises (SME). The Government’s Business Finance Guarantee Scheme aims to assist SMEs needing credit for cash flow and other financial problems. Under this scheme, your business can borrow up to $5 million for a five-year term. There are multiple lenders in the scheme, and the government assumes 80% of the default risk. However, your business still needs to pay back the loan per normal, along with interest. 

This article explains the Business Finance Guarantee Scheme, how it works in practice, and which businesses are eligible for the scheme. 

What Is the Business Finance Guarantee Scheme?

The scheme encourages banks to offer a term loan or revolving credit facility to small or medium businesses in need of credit for cash flow to respond to the impacts of COVID-19. An SME can include a sole trader, company, partnership or trust. The government takes up to 80% of the loan’s default risk. The aim is to encourage banks and lenders to support lending to businesses that might be in financial trouble.

All New Zealand registered banks and non-bank deposit takers (non-banks) are eligible to apply to join the scheme. Current participants include ANZ, ASB, BNZ, Heartland Bank, Kiwibank, TSB, Bank of China, Westpac and the Nelson Building Society. You can apply for up to $5 million from each except for the Nelson Building Society. As a non-bank, the limit is $3 million. 

Note: the Government guarantee does not limit your business’ liability for the debt. If your business defaults on a scheme loan, the lender will follow its default processes to recover the debt. 

How the Business Finance Guarantee Scheme Works

Firstly, you must submit a loan application through one of the scheme’s lenders (such as the major banks). Note that your business does not have to draw down existing loan facilities before applying for a Business Finance Guarantee Scheme loan. As part of the approval process for a scheme loan, the lender sets out key details such as:

  • the amount and term;
  • the interest rate;
  • whether you need to provide documents that show your business can afford to repay the debt, such as a cash flow forecast or business plan; and
  • whether it will rely on existing or require new security and guarantees to support the debt.

There are limits on how you can use the money from the Business Finance Guarantee Scheme loan. Your business cannot use it to fund:

  • dividends or on-lending;
  • refinancing of amounts owing in excess of the agreed limits under other loans and facilities with your bank; and
  • re-financing or repaying more than 20% of your business’ existing debt.

Note: You can use the Scheme’s loan to fund dividends or on-lending to the borrower and each person, if any, who has guaranteed the borrower’s obligations to the lender. 

What Businesses Are Eligible for the Business Finance Guarantee Scheme?

Note that not all businesses are eligible for the Business Finance Guarantee Scheme. The scheme targets small to medium-sized business in New Zealand. To be eligible to apply for credit from a bank:

  • you must base your business in New Zealand; and 
  • your business must have annual revenue of $200 million or less in its most recent financial year. 

Alternatively, you may wish to apply for credit from a non-bank. In that case, your business must have annual revenue of $50 million or less in its most recent financial year. 

Moreover, residential or commercial property developers are not eligible for the scheme. Neither are property investors, local authorities or council-controlled organisations. Your business also cannot be on its bank’s credit watchlist as of 30 September 2019. 

Key Takeaways

The Business Finance Guarantee Scheme provides a government-backed term loan for businesses struggling financially in the wake of COVID-19 and the associated lockdowns. If your business is eligible, you can apply for a term loan or revolving credit facility through a scheme lender. Likewise, the government will take up to 80% of the loan’s default risk. The scheme aims to encourage banks to lend to businesses that may be in financial trouble with the pandemic. 

If you want to know more about the Business Finance Guarantee Scheme, contact LegalVision’s business lawyers on 0800 005 570 or complete the form on this page.

Frequently Asked Questions

What is the Business Finance Guarantee Scheme?

The scheme supports banks and other lenders offering a term loan or revolving credit facility to businesses in need of credit for cash flow to respond to the impacts of COVID-19. Eligible business structures include companies, sole traders, partnerships or trusts. The government takes up to 80% of the loan’s default risk to encourage banks and lenders to support lending to businesses that might be in financial trouble.

What can you use the Business Finance Guarantee loan for?

The scheme aims to provide for businesses’ current and up-coming operating cashflow needs (including things like rent and staff expenses) and capital assets and projects related to, responding to or recovering from the impacts of COVID-19.

Does the business have to pay back the loan if the government guarantees it?

Yes, businesses still have to pay back loans per this scheme in the normal way, with interest. The government guarantee merely provides some assurance to banks and lenders that they will get their money back if your business defaults on the debt.

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