New Zealand businesses are increasingly taking out partly government-backed bank loans via the Business Finance Guarantee Scheme (BFGS).
As at January 1, 2,397 businesses were borrowing $1.3 billion via the COVID-related scheme, made available in April.
Three months prior, 1,090 businesses were borrowing only $288 million, according to data published by the Reserve Bank.
So, the value of loans written under the scheme more than quadrupled in the three months to January 1, while the number of businesses taking out loans more than doubled.
Accordingly, the average loan size under the scheme has been on the rise, hitting $541,993.
The uptick coincides with business confidence rebounding strongly in late 2020 to a point higher than before Labour came into government in 2017.
It also follows the Government making the scheme available to a wider range of businesses, allowing them to use the funding for capital investments as well as operating costs, and increasing the limit on the amount businesses can borrow 10-fold to $5 million.
Under the BFGS, businesses can get loans from participating lenders that are 80% guaranteed by the government. So, if the business defaults on the loan, 80% of the loss will be carried by the taxpayer and 20% by the bank.
Participating lenders (ANZ, ASB, BNZ, Heartland Bank, Kiwibank, TSB, Bank of China, Westpac and Nelson Building Society) can determine loan sizes and terms, and whether or not to take security.
Finance Minister Grant Robertson scrambled to unveil the scheme in March, as financial markets were in meltdown mode. He urgently wanted to signal to businesses the Government would help banks keep lending, ignoring Treasury’s warning to hold fire announcing the scheme until it had fleshed out details with banks.
Robertson committed to underwriting $6.25 billion of loans under the scheme.
However, a hesitancy from businesses to borrow in a highly uncertain environment, coupled with a relatively tight criteria saw the BFGS sit largely untapped until around September/October.
While the scheme started being used more in late 2020, banks’ overall business and agricultural lending (which includes BFGS loans) continued sliding until at least November, when the latest data is available.
Banks’ business lending fell by 5.4% ($6.3 billion) in the year to November, while agricultural lending fell by 1.8% ($1.2 billion).
While the $1.3 billion lent under the BFGS is a fairly sizeable sum, it only makes up 0.8% of New Zealand-registered banks’ business and agricultural loans.
$1.7 billion lent to businesses directly by the govt
As for the Small Business Cashflow Loan Scheme - a second scheme whereby the Government directly writes businesses loans of up to $100,000 (depending on how many people they employ) - the uptake has been strong.
As at January 15, $1.7 billion had been lent to 102,065 businesses. The average loan size was $16,265 and the approval rate was 92%.
These loans are interest-free if repaid within two years.
In February the eligibility criterion will be expanded. Businesses have until December 31, 2023 to apply to the Inland Revenue for loans under this scheme.