Wayne Mills is weighing up whether to close the doors and walk away from the 38-year-old Orewa rental car business that was supposed to provide his retirement nest egg.
A qualified mechanic knocking 70, he is working part-time issuing warrants of fitness, having laid off his two workers, sold off two thirds of his once 35-car rental fleet and sublet part of his premises to a builder.
“I was expecting to retire with a couple of hundred thousand dollars from selling the business … I was planning on travelling and having money to do some things with, and I’ll have bloody nothing.”
The prolonged Auckland lockdown, on top of the border closure, may be the last straw for struggling businesses, but the real crunch is expected to come when wage subsidies and resurgence payments end, and there are already signs of the pain to come.
* New Covid-19 reality is coming – but is your business ready?
* Jump in number of Auckland businesses shutting doors in lockdown, data shows
* Business closure rates ‘were already increasing before lockdown’
* Coronavirus: Christchurch hospitality group in liquidation after Covid-19 lockdown struggles
Centrix chief executive Keith McLaughlin says there is a sharp divide developing between those businesses able to open under Auckland’s current alert levels and those forced to remain closed.
Court applications to liquidate failing businesses have picked up this year with the 453 filed to the end of October already surpassing applications for the whole of last year.
The figures are still well below the previous two years (852 in 2018 and 702 in 2019), and Dot Loves Data director Justin Lester says they are nowhere near the levels seen during the global financial crisis when there were 600 liquidations in a single month in April 2009.
However, liquidators and insolvency experts say processing liquidations takes time, so the true scale of the problem may not be apparent until well into next year.
Christchurch-based Insolvency Matters director Brenton Hunt says that for obvious reasons banks and Inland Revenue (IR), which instigates about three quarters of liquidation applications, have given businesses more leeway than in the past.
“And a lot of creditors don’t want to be seen to be overly aggressive.”
Rodgers Reidy director Geoff Brown, predicts a surge in liquidations in mid 2022, but he says it could happen sooner if Inland Revenue becomes more active, banks adjust their lending practices on the back of higher interest rates, and landlords take a harder line on rent payments.
Centrix credit reporting agency chief executive Keith McLaughlin notes that company defaults rose 3 per cent last month, and were particularly marked in Auckland where companies failing to pay their bills were up 18 per cent on pre-Covid levels.
Trisha Roberton of Massey in West Auckland used to run a hairdressing salon from her home until Covid restrictions forced her to close and sell her home.
After three months in lockdown with no cash flow to cover fixed costs such as rent, insurance and vehicle leases, he says business owners may choose to close the doors and try to come to some arrangement with creditors, so they can exit the business “with something intact”.
Another factor keeping liquidation at bay is that many business owners learned from the first lockdown, shifting to online sales, so they were better prepared for the latest one.
“They kicked their contingency plans into place, so the impact was less,” McLaughlin says.
Nevertheless, McLaughlin sees a marked split between businesses able to trade, albeit at a much lower level, and those unable to open at all, such as hair and nail salons. “Face to face businesses are really suffering.”
James Carlisle can attest to that. The co-founder of the Vivo hairdressing chain, which has about half of its 90 salons in Auckland and Waikato, is getting more calls from hairdressers desperate to sell up.
“In normal times we’d get approaches every couple of weeks, but over the last six weeks we’ve been getting them every two or three days from Auckland salons.”
“It’s the small ones that don’t have the resources that are the most panicked.”
The impact of the last lockdown was felt well outside Auckland’s boundaries and proved to be the final straw for the Three Pillars Cafe in New Plymouth, which closed last month after 12 years. New operators will reopen early next year after renovations.
The ability to hunker down and minimise outgoings has helped some businesses survive.
Auckland driving instructors Susan and Noel Matencio are in the same category as hairdressers when it comes to restrictions on their ability to operate.
The difference is they are not paying rent on premises and have been able to mothball their two-year-old business Above All L’s Driving School.
Many of their students are Filipino migrant nurses seeking New Zealand driver licences and Noel Matencio says the wage subsidy is keeping them afloat, with the occasional essential worker cleaning job helping to cover the grocery bill.
Economic development agency Auckland Unlimited had 53 takers for a mid-September webinar on successfully closing, hibernating or continuing a business.
Presenter Grant Thornton partner Ray Cox says delaying a decision to pull the plug can severely limit an owner’s options, especially if they have taken a head in the sand approach.
“You need to have a good understanding of your financial position because there can be skeletons in the closet … you may be more insolvent than you think.”
If 20 per cent of debts is uncollectible and has to be written off, that can knock a big hole in a company’s balance sheet, Cox says.
Orewa Rental Cars owner Wayne Mills has been careful to minimise his debts, selling off 25 of his 35 vehicles. “About now I’d buy four to five cars to get stock back up for the coming season, but there’s not going to be a coming season.”
Mills is grateful his debts are low compared to many other businesses.
He has watched annual turnover at Orewa Rental Cars shrink from more than $250,000 to about $50,000, and he downsized accordingly, not investing in new cars to replace old stock.
With just two bookings for Labour Weekend and none at all for the normally busy Christmas period, the future is not looking great.
His landlord has been understanding and about half his $11,500 debt is the remainder of a government small business support loan.
So far, defaults on almost $5 billion in Government-backed Covid-19 loans have been low, but losses may mount up if a growing number of businesses tip over.
The business finance guarantee scheme, which closed applications in June, has loaned $2.8b to 4035 borrowers, about a third of them in the Auckland region.
The lender-managed loans were under-written by the Crown which will pay 80 per cent of any losses incurred, and it has so far received only one claim for $24,077.
Finance Minister Grant Robertson has no regrets about the ready availability of loans to businesses which he says was needed early on in the pandemic to cushion them against any possible tightening of credit conditions, as was the case in many other countries such as Australia and Britain.
Just over $2b has gone out to 128,058 customers in small business cashflow loans administered by Inland Revenue, and it has written off $1.2 million in loans to 140 businesses, mostly because of liquidations.
Finance Minister Grant Robertson does not have any specific forecasts on how much could end up being written off as a result of company failures, and he says the loans and wage subsidies have helped support a better-than-expected economic recovery.
Small business loan applicants have to declare their business is viable, and have a plan to ensure it remains so.
Inland Revenue says if that is untrue, or later becomes untrue, borrowers may have to repay the loan immediately, with default interest charged, and prosecution may be considered, but it would not reveal whether that had occurred.
Hunt says the small business loans were easy to get. “It was a tick box on the IRD website and most people were so desperate at the time they just went ‘I want the money.’
“I had one last year where the IRD said the person obviously committed fraud because they’d made an undertaking they were solvent, when they were not.”
Small business cashflow loans are designed to help cover fixed costs such as rent, insurance and rates. Since the alert level change in mid-August, Inland Revenue has received $156m in loan applications for 10,137 businesses.
Brown’s concern is the unknown number of “zombie” companies that were already technically insolvent and should have closed last year, but were propped up by Government support packages.
“There’s so much Government stimulus it has sort of papered over the cracks.
“Almost every liquidation without question that we’re seeing now had a small business loan … some of those for larger companies can be pushing $100,000, and it’s a straight write-off, whereas if the directors had liquidated the company when it was insolvent, they wouldn’t have taken that loan, and it wouldn’t have been written off.
“Putting my New Zealand taxpayer hat on, I think that will be quite scary.”
Brown says Auckland businesses will be under enormous cumulative pressure from the minimum wage increase in April, inflation of 4.9 per cent pushing up prices, and a probable increase in interest rates.
Savvy operators keep an eagle eye on marginal accounts, and many supplying the hospitality sector insist on seven day terms, and refuse service to those creeping over the limit to avoid being dragged down if customers collapse.
Suppliers are advised to keep close tabs on accounts for hospitality outlets to ensure they do not get left with massive debts if businesses shut down.
“If they’re only owed for seven days worth of supplies, they can probably bear that, but if you’re talking multiple failures that are months and months behind, it could be them that are facing insolvency,” says Brown.
Despite the building boom, the construction industry is regularly represented in liquidation applications, with soaring prices for materials and supply chain problems adding financial pressure as projects are delayed.
Auckland Unlimited director of investment and industry Pam Ford says three quarters of Pacifika businesses in Auckland are sole traders, and many work in construction.
“If they get Covid, or are a close contact and have to down tools and can’t work for some time, they lose jobs, and that puts pressure on bigger players up the chain.”
Although construction sites can operate under Auckland’s current alert levels, the need for social distancing and long waits to get supplies unloaded at the port is affecting productivity.
Ford expects the impact of Covid-19 to have a long tail. “After last year’s lockdown a lot of sole traders who had built up debt when they were unable to work went out of business three, four or five months later.”
Construction companies are struggling with delays in shipping materials from overseas and difficulty obtaining locally manufactured products caught up in the Auckland lock down.
Further south, Hunt is also seeing plenty of hurt in the construction sector because tradies cannot get building materials or staff.
“I’ve had some very sad conversations with people saying ‘I haven’t worked for four to six weeks because I can’t buy my core product to do the work’, and these are guys who haven’t necessarily ever been insolvent before.”
For all the angst about the uncertain economic outlook, there are still plenty of Kiwis starting new businesses, in some cases to replace employment lost to Covid-19.
Dot Loves Data monitors business openings and closings based on Companies Office registrations, and Lester says openings spiked at just under 15,000 in August.
They dropped to 12,538 in September but still vastly outnumbered the 3392 closings which most affected rental, hiring and real estate services, followed by professional, scientific and technical services, and construction.
“People have had to hustle … there’s been a rush into the digital space as people tried to sell online goods for example.”
AJ Judkins set himself up in business as a window and building washer following closure of Christchurch clothing store Hunters and Collectors.
Statistics NZ does enterprise counts based on data from Inland Revenue that includes sole traders who have not bothered with company registration, and at the end of September New Zealand enterprises numbered 553,170.
AJ Judkins’ building and window washing business AJ’s Purewash is a world away from the 17 years he spent behind the counter at Christchurch clothing shop Hunters and Collectors, and it pays better too.
After the High St store closed in February Judkins, 42, picked up casual work water blasting buildings, but one day’s work a week was not enough, and the disappointment of receiving a $40 finders fee for pulling in $7000 worth of work from a real estate agent pushed him into going out on his own.
“I thought, this is not rocket science, so I bought a water blasting unit and started contacting people I’d sold jeans to for all those years.”
He picked up tips from watching YouTube videos of professional house washing crews, and support from former customers has allowed him to repay his partner for the money she loaned him to buy a ute.
“I absolutely love it, I couldn’t be happier.”
Prospa’s New Zealand managing Adrienne Begbie says their lending is up as businesses seek funds to pay for extra stock as they reopen, and to ensure sufficient supplies for Christmas.
Over the last quarter borrowing totalled $22m, compared with $5.9m for the same period last year, and there had been a 173 per increase in the number of businesses taking out loans.
Begbie says it was noticeable that fewer customers deferred payments over the recent Auckland lockdown and instead paid what they could.
“It’s different this time, people have stronger balance sheets and have found different ways to work.
“We’re seeing people investing in their business to be able to grow and survive.”