Small businesses likely need to consider both short and long-term solutions to cover operating expenses during the coronavirus outbreak. The government, The Reserve Bank and retail banks have announced, “a six-month principal and interest payment holiday for mortgage holders and Small Medium Enterprise (SME) customers whose incomes have been affected by the economic disruption from COVID-19.” It includes “a $6.25 billion Business Finance Guarantee Scheme for small and medium-sized businesses, to protect jobs and support the economy through this unprecedented time.” (Hon. Grant Robertson. beehive.govt.nz, 24 March 2020). A Small Business Cashflow Loan Scheme was also announced on 1 May 2020. However, you might also need to apply for more traditional financing to tide you over as you wait for government applications to be processed.
A business line of credit gives you access to a credit limit that runs anywhere from $1,000 to $500,000+ — though it varies widely by lender. Interest rates are variable and depend on your business’ financials and credit score. You may find that you pay more for the convenience of a line of credit when compared to a business loan. You also need to factor in an origination fee, a monthly or annual service charge and a fee each time you withdraw funds.
Once you receive approval for a credit line, you can quickly access cash as needed — usually no later than the next business day, which makes it ideal if you expect to need funding, but aren’t sure how much or how long that need is going to last. It can be less expensive than a credit card in some cases, plus it can cover a wider range of expenses, like rent and utilities.
Online business loans can get cash in your bank account as soon as the same day, depending on the lender. These tend to run from $1,000 to $500,000 with the annual percentage rate (APR) dependent on the lender, your credit score and business financials.
Unlike banks and credit unions, online lenders process your application using an algorithm, which cuts down the time it takes to receive a decision from days to a matter of seconds. The downside is many come with high rates compared to other loans. Plus, some can come with weekly or even daily repayments, which can be difficult to swing if your revenue is low and expected to drop more.
Many business credit cards come with signup bonuses of reward points, extra cashback or a special interest rate on balance transfers — if you qualify. A low promotional balance transfer interest rate gives you access to affordable financing, as long as you can pay off the balance before the regular interest rate kicks in.
If you don’t think you can pay off the balance before that date arrives, a loan or line of credit might be less costly since they tend to have lower interest rates. You typically need good credit and a strong history of business financials to qualify.
If you already have a business insurance policy, reach out to your provider to find out if you have any coverage during a pandemic. If you do, you could receive a claim to help cover operating costs. The size of your claim depends on factors like your location, the size of your business, what industry you’re in and the insurance company you work with.
Don’t already have insurance? Starting a new policy now won’t help much — you won’t be covered for events that happened before you had insurance.
Invoice factoring is in its infancy in New Zealand. It involves selling unpaid invoices from other businesses or government contracts at a discount to a factoring company. Typically, you receive up to 85% of your unpaid invoice balance upfront, and then the rest minus a fee as the invoices are filled. Generally, it’s more expensive than a term loan or credit line.
When exploring your options, try to find a lender that offers non-recourse factoring, which means the factoring company takes the loss if your invoices aren’t filled. With recourse factoring, your business is responsible for paying back the funds if your customer doesn’t fill their invoice in time — which is highly possible during the coronavirus outbreak. Non-recourse factoring tends to come with higher fees.
Invoice factoring might be costly, but it could be easier to qualify. Your eligibility doesn’t depend on your business’ credit or revenue — it depends on your clients and their invoices. It also doesn’t involve debt repayments, which can hamper your business as it tries to recover from a loss in revenue. However, it can take anywhere from days to weeks or even months, depending on the factoring company and how long it takes clients to pay.
What about invoice financing?
Invoice financing allows you to take out a loan using your business’ invoices as collateral. You pay off the loan plus interest and fees, ideally as your clients start filling invoices.
Invoice financing is usually less expensive than factoring. However, if your repayments mainly depend on clients filling their invoices on time, this option could set you up for default in a time when businesses are struggling to stay on top of their bills.
The New Zealand government has committed billions of dollars to businesses impacted by the coronavirus outbreak. You may qualify for one or more of the initiatives put in place around wage subsidies, tax and commercial tenancy.
You can also find out more about how New Zealand banks are helping and learn about other options for financial support in our guide for businesses during the COVID-19 outbreak.
Negotiate with suppliers and creditors
Some banks and credit card companies are waiving fees, deferring payments and offering other financial assistance to help businesses cope with the financial fallout of the coronavirus outbreak. However, many of these are available on a case-by-case basis, so you need to call to learn what your options are.
Suppliers might also be willing to negotiate new payment terms to make sure they don’t lose your business. Get in touch as soon as you can, as skipping payments without communication can hurt your relationship with your supplier — and hurt its ability to operate.
Cut back on expenses
Go over your business balance sheet to see where you can cut back. Especially if you’re paying for something that you no longer need if your employees are working from home — like office utilities and overhead costs. After you qualify for finance or see an uptick in revenue, you can start adding back programmes if they make your business operations run more smoothly.
These strategies can help you make sure you get the most out of your sales.
Discount early payments. Provide an incentive for your clients to pay ahead of time by offering a discount. You won’t bring in as much, but it could avoid the need for costly financing.
Sell equipment you aren’t using. Instead of letting old equipment sit around, turn it into a profit — or trade it in if you can to secure financing.
Ask for a deposit on orders. To avoid that gap between receiving an order request and payment, ask customers to provide a deposit of at least 50% on large orders, which can help cover production costs and avoid the need for finance.
Negotiate costs and terms. When possible, give a counteroffer when ordering supplies or renegotiate the terms of payment to better fit your business’ monthly cash flow.
Offer subscriptions. A subscription can translate into more consistent revenue than one-off sales.
There’s a chance you need to combine multiple types of financing to cover your operating costs during the COVID-19 outbreak since low-cost options tend to take a while to come through. However, communicating with your creditors and suppliers right away is vital — they might be able to adjust your repayments so you don’t have to borrow as much.
The New Zealand government has introduced a wage subsidy scheme to support businesses and their staff. There has to have been a 30% decline in actual or predicted revenue when compared to the same period last year, and this loss in revenue has to be attributable to the Covid-19 outbreak. The subsidy pays $585 a week for a fulltime employee and $350 a week for a part-time employee for a period of 12 weeks. Eligible businesses include “being a registered business, sole trader, self-employed person, registered charity , incorporated society , non-government organisation, or post-settlement governance entity.” (workandincome.govt.nz).
On 17 August 2020, the government introduced the Resurgence Wage Subsidy, due to the return of COVID-19 in the community. Available for a 2-week period, it is for businesses, “who have had, or expect to have, a revenue drop of at least 40% because of COVID-19 for a continuous 14 day period between 12 August to 10 September compared to a similar period last year,” (Work and Income, 2020).
On 17 March, the leave and self-isolation scheme was introduced by the government, which can support workers if they are unwell with Covid-19 or if they have to self-isolate or care for dependents. Payment is $585.80 per week for a full-time worker and $350 per week for a part-time worker.
Anna Serio is a trusted lending expert and certified Commercial Loan Officer who's published more than 950 articles on Finder to help Americans strengthen their financial literacy. A former editor of a newspaper in Beirut, Anna writes about personal, student, business and car loans. Today, digital publications like Business Insider, CNBC and the Simple Dollar feature her professional commentary, and she earned an Expert Contributor in Finance badge from review site Best Company in 2020.
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