Covid-19

SMEs ‘doomed to fail’ after inadequate Govt response

A strongly-worded letter from the Franchise Association to the PM and top ministers says many small businesses will be forced to close permanently unless the Government steps in quickly with help for rent payments.

Robyn Pickerill is angry and frustrated. The chief executive of the Franchise Association has added her voice to a string of business leaders saying the Government got it wrong when its package for small and medium-sized businesses didn’t provide help with rent payments.

On Thursday Pickerill sent a letter to Prime Minister Jacinda Ardern and her top ministers on behalf of the approximately 37,000, mainly small franchising businesses, whose turnover is estimated at $27.6 billion – or approximately 11 percent of New Zealand's GDP.

The letter criticised the support package and called for urgent action to be taken to prevent business closures. 

In particular, “we implore you to address the critical issue of rent relief to tenants of commercial leases - as many leases do not provide any rent relief”.

Franchise Association CEO Robyn Pickerill says some SMEs will fail without government support with rent payments. Photo: Supplied.

Pickerill says failure to consult with the SME business sector “has resulted in a package that we think will not work for many small to medium-sized businesses.

“Many of those businesses are doomed to fail, at considerable cost to their employees, owners and other stakeholders”.

Loss carry-back useless for many

Pickerill says the Government’s tax back scheme (where businesses forecasting losses will be able to claim cash payments against tax previously paid on profits) won’t work for many family-owned companies.

“Many small and medium businesses do not operate with substantial profits from year to year. These are businesses that are often operated by family members and exist in order to provide jobs for family members including the proprietors. This is not to say that they are not thriving and viable business endeavours, but there are not going to be substantial profits against which losses can be offset to provide actual cash in the hands of the business owner.

“A loss carry-back mechanism is not the same thing as immediate cash in the bank of a business owner.”

Former chief executive of Business New Zealand Phil O'Reilly said the same thing earlier in the week in an interview with RNZ.

"The challenge is many of these small businesses that employ plenty of people won't be all that profitable in a normal year, so the tax back to them probably won't be enough to stave off the inevitable bad news of closure."

O'Reilly said more government support was needed.

Widespread criticism

Other organisations have also criticised the Government’s response and called for more action to help businesses with no or little cash flow but significant costs. Critics include Retail NZ, the Auckland and Otago Chambers of Commerce, the Property Council and even Tenby Powell, chairman of the Government's own Small Business Council.

Pickerill says the Government’s announcement has made the situation worse for many SMEs.

Landlords and creditors will be moving full steam ahead to demand payment from SMEs and their guarantors.

“Landlords and creditors are making it known to franchisees and franchisors, in particular where there is a commercial lease involved, that they want to be paid now.

“In the light of the Government package, we believe landlords and creditors will now be moving full steam ahead to demand payment from SMEs – and their guarantors. The fact that they need to wait 30 days [one concession in the government package] will not stop landlords, it will just defer them temporarily. 

Pickerill says the situation is particularly dire for retailers and food businesses in malls, where even under Level 3 they still won’t be able to open, or even get into their premises. 

It could be months before businesses get back to pre-Covid turnover. Photo: Lynn Grieveson.

Then there are many bars, shops and other businesses where online or contactless trading isn’t an option. Even a cafe or restaurant that is allowed to open for takeaways under Level 3, or might be allowed a few, spaced-out tables under Level 2, won’t be looking at anything like the turnover they got before the virus hit.

“It’s naive to expect business is going to jump to pre-Covid levels; it might be 30 percent, if they are lucky. But many landlords are still expecting full rental.”

The Franchise Association wants the Government urgently to review its decision not to provide any cash help for businesses which can’t trade but still have significant fixed costs.

It’s also calling on ministers to consider measures introduced in Australia to force landlords to provide rent relief for their tenants.

Under a new mandatory tenancy code across the Tasman, commercial landlords will have to reduce rent in proportion to how much business the tenant has lost during the crisis period. At least 50 percent of the reduction has to be rent waivers, not deferrals. 

Many leases in New Zealand do not have any provision for rent relief, Pickerill says, and many landlords are taking a tough line. 

“They are refusing to grant any rent relief or are trying to leverage enhanced terms (and in some cases personal guarantees) - which we think is abhorrent.”

The Government does not seem to understand the urgency of the situation.

She says every day she talks to small business owners who have no idea how they are going to stay afloat.

“The Government does not seem to understand the urgency of the situation facing SMEs. People are hoping they can stay open, but they need government assistance. And they need it immediately. 

“This is a dire problem for business.”

Justice Minister Andrew Little told Newsroom earlier in the week the Government had no plans for further announcements around commercial rents. However Finance Minister Grant Robertson told media on Friday he was willing to look at rent relief.

"I’ve said before we are considering that. We need to look overall at how we support businesses to get through this. Our focus has been on those that are vulnerable but viable and we will continue to look at that."

Asked about hospitality businesses facing tough times, Robertson didn't appear to share Pickerill's sense of urgency.

"We will take our time over the coming weeks and months to work out how each individual sector is supported, but we have work under way on further support for business," he said.

The question is whether or not that is too late for many SMEs.

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