An idea that can help SMEs’ cashf low
Anyone who owns or operates a small-to-medium enterprise (SME) in New Zealand will be familiar with provisional tax – introduced by the IRD in 2003 to help businesses improve cashflow management by eliminating large endof-year tax bills.
It’s a great idea on paper, being that businesses make smaller, manageable payments throughout the year – which, in theory, is supposed to provide greater consistency in cashflow, and business owners won’t need to stress about a monster tax bill when it comes time to file the return.
Except the reality for most SMEs is that they’ve now got four stress points during the year that require the business owner to find cash they might not have, to pay a bill that isn’t technically due. In trying to help solve a problem, the IRD have made it four times worse.
As a result, most businesses will drain their cash reserves – which removes precious working capital funds, making it difficult to invest in the business, even if that was the right thing for the business.
If you could easily access additional funds to replace your depleted working capital, this might not be a problem, but that’s easier said than done.
The most common option to access funds involves going through the arduous bank application process to get a business loan or overdraft at a ridiculously high interest rate (currently north of 15%).
That is, if you are lucky enough to even qualify in the first place.
If you do get approved for a business overdraft from the bank, it also likely means having to put your home up as collateral.
If you don’t have a home, or can prove that you can service the needed borrowings, then you will do what most small business owners do – accept that no help is coming, and not pay yourself for a while, using your personal credit cards to help tide over the business, and accept that you can’t do what the business needs right now.
But Taxi – the latest fintech brainchild from Nicola and Josh Taylor, co-founders of Tax Traders – could be the lifeline SME owners have been waiting for. In its simplest form, it is access to guaranteed lending at a cheaper rate than the bank, without any hoops to jump through.
It’s what small businesses have been crying out for, and what Taxi delivers.
As a business owner, I know firsthand that the difference between getting a good business outcome versus a bad one usually comes down to the timing of when the opportunity arose, and whether you were in a cashed-up position to take advantage of it.
If the customer paid a little bit earlier or even just on time, if the stock arrived on time, if the discounted offer lasted a little bit longer, if you didn’t have to pay for the stock in advance – if, if, if – it could have all worked.
If you’ve got the cash, you can withstand the customer paying late, and still buy stock in advance and get that discount. Cash gives you resilience to withstand shock, and buys you the chance to be opportunistic and ambitious.
Cash is what buffers you from timing problems, and that’s why small businesses bear the brunt of everything – under the best of intentions, provisional tax has taken the buffer of timing protection away from those who need it the most.
That’s where Taxi has the potential to be a game changer.
Taxi offers a business overdraft with a twist – business owners can access up to 90% of their provisional tax payments.
Your provisional tax payment that is otherwise sitting idle is, in effect, guaranteeing your overdraft. To be able to access this lending, you have to pay your provisional tax through the Taxi trust account – which is linked to the IRD trust account, just as you would if you were tax pooling.
You never know when you’ll need cash. In my experience, you’ll usually need it when you don’t have it. And this tool protects you from that outcome, and at the very least gives you more options.
Two clients I’ve worked with illustrate this perfectly.
The first is a cafe owner who needed to upgrade her menu and exterior signage. The discounted cost of the upgrade was $10,000 – but so was her provisional tax payment. If she gave the go-ahead at the time, she’d get a $5000 discount.
She met her IRD obligations at the expense of upgrading her signage, and now she’s paying $5000 more because she couldn’t time her cashflow correctly.
If she had borrowed against her provisional tax payments through Taxi, it would have only cost her less than $100 in interest. Instead, she incurred a $5000 higher cost.
The second client was self-employed and was wanting to purchase an investment property.
When the deposit needed to be paid, he was due $500,000 from customers – and, on the basis of that being paid, he was comfortable he could pay the deposit.
But the money owed to him was delayed, which meant he didn’t have the cash on hand to pay the deposit when it fell due. He was also up to date on his provisional tax payments – more than $50,000 – which was greater than the amount he needed to pay the deposit.
Bad timing with no backup meant a bad result. He was unable to go unconditional on the property, and missed out when it was a great buy at a crucial point in the property cycle. All because he didn’t have access to the money at the right time.
As with taking on any type of finance, it’s important to understand the potential risks involved, and speak to a financial adviser to assess your situation and discuss the viability of Taxi for your business.
I’m recommending that my clients look at signing up for Taxi when paying their provisional tax, because you won’t know when you’ll need it (and in the best outcome, you won’t need to), but by doing so, you’ll be creating the option to draw down these funds if needed.
It’s a good concept if you’re struggling with provisional tax, and it’s great if you want to keep your options open, which can be the key to keeping the doors to your business open.
This column is not intended to constitute financial advice, which will vary depending on individual circumstances.