Should small businesses borrow more?
The cost of borrowing is at historic lows – so should small businesses take on more debt to enhance their businesses?
Technology company Xero’s managing director for New Zealand and the Pacific Islands, Craig Hudson, said this was a great time for small Kiwi businesses to tackle their chronic under-investment in technology to come back from Covid-19 ‘‘better and smarter’’.
A recent Xero survey of small Kiwi businesses with fewer than 20 employees showed that only 7 per cent were planning to take on more debt in 2021, and 76 per cent were already concerned about the debt they took on this year.
The performance of Kiwi businesses had been solid, and year-on comparisons had shown that they had bounced back, but there was ‘‘trepidation’’ about the future, Hudson said.
Small business were worried that they would not be able to repay debt if Covid-19 brought more lockdowns or there were worsening global impacts on New Zealand’s economy. But the extension of the Government’s Small Business Cashflow (Loan) Scheme provided an opportunity to access debt interest-free for two
years, so businesses did not have to worry about the next 12 months at least. The loan had to be paid back within five years.
The loans are provided through Inland Revenue, and the application period has been extended until the end of 2023. The extension broadens what the loan can be used for to include investment in equipment and technology.
The scheme loans small businesses $10,000 plus $1800 for each employee, up to a maximum of $100,000 for a business with 50 employees. The business has to have received the wage subsidy or been eligible for the wage subsidy.
Hudson said small businesses could use the scheme to address their lack of crucial technology tools that would free up time and supply information about their business as it happened. This would enable them to make decisions quickly rather than relying on gut or intuition, or waiting amonth for a report from an accountant.
These tools were ‘‘relatively lowcost’’, Hudson said. A business could pull together several technology products depending on the industry it was in.
The hardest exercise was determining what digital tools were needed, he said.
This took time that many small businesses owners did not have.
The implementation was crucial,
Hudson said. If it was set up right, the business was more likely to be successful.
This was where the most cost was. After that, the cost was probably about $350minimum a month for the subscription costs for the tools chosen.
Business consultancy PwC’s executive director of strategy and digital transformation, Andrew Jamieson, said that while low interest rates were good, businesses had to ask themselves what they would use the money for.
Businesses should not be tempted to paper over problems in their performance just because attractive credit was available, he said, ‘‘because ultimately, you have to pay it back’’.
The Government’s small business cashflow scheme offered particularly attractive terms, Jamieson said. It was a five-year loan, and if paid back in two years, there was no interest.
PwC knew multiple businesses that had used the scheme before the extension, ‘‘not with any particular need’’ but which were holding the money because of uncertainty – and if they did not need it, they would pay it back, Jamieson said.
Even if the business did not repay the money within two years, the interest rate – 3 per cent after two years – was probably half of what a business would have to pay for an unsecured commercial loan.
Irrespective of the scheme, businesses should look at their debt and whether they were paying too much interest, he said. There was the opportunity to consolidate debt if some lines of credit were ‘‘painful’’.
For some businesses, the drop in interest rates would make the business case for spending on machinery and technology worthwhile.
New Zealand had had a low productivity problem for years because of the cost of capital, Jamieson said. PwC was seeing business spending on automation of financial processes and supply chain digitisation, where businesses were trading off between the costs of the technology versus the cost of an outsource provider or an employee or part of an employee.