IRD scheme: Tauranga businesses owe millions - and now face paying interest

An expert fears the end of an interest-free IRD loan period could be ''another nail in their coffin'' for businesses owing millions and struggling with the pandemic.

Inland Revenue's Small Business Cashflow Scheme was introduced in May 2020 to help small to medium businesses struggling with revenue during the Covid-19 pandemic.

The scheme provided a two-year interest-free loan of $10,000 initially plus $1800 per full-time employee for up to 50 employees, meaning the first loan applicants will soon accrue 3 per cent interest on unpaid loans.

In February, the loan amount increased to $20,000.

On the first day of the scheme, Tauranga businesses made 1000 applications. To date, there have been 7193 applications and 6407 loans approved with a value of almost $101 million.

Information released to the Bay of Plenty Times under the Official Information Act revealed Tauranga businesses still owe $88.5m under the scheme.

To date, 510 businesses have fully repaid about $8.35m while 798 have made at least one payment – a total of $3.9m. Only 10 per cent of loans granted in the first month have been paid off.

Bay of Plenty-based Rodewald Consulting Limited director Tom Rodewald said the money loaned through the scheme was relatively minor for businesses, and the interest rate quite low.

He said the loan itself would not send a lot of businesses under.

"But combined with other factors, it's just another nail in their coffin."

He said things in the insolvency field were "pretty slow".

"That's a sign the economy is still awash with money."

Other signs, such as tax debt, increased interest rates and loan or interest repayments, including money borrowed from the Government, combined with inflation, wage pressure and staffing shortages, were pointing to problems later in the year, he said.

An increased number of insolvencies was forecast for later this year, he said.

Hospitality New Zealand Bay of Plenty branch president Reg Hennessy said those in the industry were very aware of the date for interest to "kick in".

Hospitality New Zealand Bay of Plenty branch president Reg Hennessy. Photo / Ben Fraser

He said some businesses would not be able to make repayments due to the impact of Covid-19 restrictions on the industry.

"Hospitality has been under two years of continuous stress and worry with no certainty of a plan to recover.

"Even when we return to a green light I'm sure the effects of this time will play out with some business owners for years to come.

Applications for the loan, administered by Inland Revenue, are open until December 31, 2023.

Inland Revenue small and medium enterprises segment management lead Sharyn Rea said the agency was aware of customer concerns about repaying their loans.

However, she was unable to say how many customers had raised concerns and said the initiatives were implemented in a high-trust manner.

"I encourage those customers to contact us to discuss the repayment options available."

Small business support service Upshot NZ Ltd co-owner Jill Fryer said some of those who received a loan would have forgotten when the interest was due to be applied.

Small business support service Upshot NZ Ltd co-owner Jill Fryer. Photo / Andrew Warner

"Quite frankly, a lot of them have no idea."

They were not trying to hide from it, she said, but had just forgotten and would be reminded when they got an Inland Revenue letter.

"It will impact on them pretty seriously in that a lot are not going to have the money there to repay the loan."

Businesses had been stretched throughout the pandemic and the next six to 12 months would see more businesses "crashing".

"As soon as people get the notices they need to get hold of their tax agent. If they can't afford to pay it, work out a repayment plan and keep to it," she said.

Business owners' attention had been on keeping the business afloat so the loan was "not on their radar," she said.

She said it was a good thing the interest would only apply to the remaining balance.

Tauranga Business Chamber chief executive Matt Cowley said the organisation had heard Inland Revenue was helpful to businesses facing major issues and needing financing options, particularly for their provisional tax.

"Many businesses who have taken up the Government's cashflow loan scheme would have hoped that the country's high vaccination levels would mean we would be operating at normal."

Tauranga Business Chamber chief executive Matt Cowley. Photo / NZME

Businesses that took up the loan were most impacted by Covid-19 restrictions, he said.

"Most businesses would prefer to be operating normally so they can pay back the loan, as opposed to the Government extending the interest-free period and continuing with restrictions."

Business debt hibernation helped companies and other entities affected by Covid-19 manage their existing debts until they can start trading normally again. For example, businesses may agree with creditors to delay repaying some of their debt.

Under the scheme, there were 127 liquidations from March 1, 2020, to December 31, 2021, in the Bay of Plenty.