Debts threaten small NZ firms

Tax owed by stressed businesses is up $182 million, and some may fail under the pressure of tax payments, holiday wages, much higher interest rates and slow trading around Christmas.

In the year to September the tax negotiated under payment plans with Inland Revenue had risen by 17 per cent to $1.25 billion.

Grant Thornton partner Peter Sherwin said the combination of provisional tax and GST payments due in the next few months, holiday pay for staff and the traditional Christmas lull in business could be too much for some recession-weary small businesses.

Unlike larger and more public companies, small and medium-sized enterprises had limited options to raise cash. "If they are tracking with modest cashflow at the moment they'll be quite cashflow negative in December and January. It will tip a few over the edge."

If business owners had their entire net worth in the business, the bank was their only option and money was harder to get now.

"Some of the newer businesses and those that are suffering are going to emerge from the recession with greater debt than when they went in," Mr Sherwin said.

Banks were prepared to back businesses that had made it through to this point, but risk was higher, and the price of money was higher.

Even with "A-class" customers banks were in some cases quadrupling the interest premium charged for an identical scenario, Mr Sherwin said.

In some cases, loan extensions were copping 2 per cent premiums, as opposed to 0.5 per cent pre-recession.

"Businesses are saying, `what is different?' But the banks are just being more conservative right across the board."

Mr Sherwin said Inland Revenue was being responsible in the recession, with a "realistic" view of how much businesses could afford. and tolerance for genuine strife.

Inland Revenue spokeswoman Catherine Delore said the longstanding message to businesses had been to contact the department early if they were struggling to pay taxes.

A similar stance was being adopted by Australia's tax office, where small business debt levels had been described as "horrendous", The Age reported.

Deloitte corporate finance partner Paul Munro said that willingness to work through issues, evident in the nearly one-fifth of companies paying taxes in instalment plans, was limited to those fronting up to admit their limitations.

"It's those that are trying to take advantage of the situation that are not getting the same positive accommodating response."

While he said debt levels had largely remained the same, as business activity dried up some companies found their debt ratios growing without any benefit.

"The equity has been eroded as has the business value," Mr Munro said.

Accountancy firm WHK partner Eddie Jansen said many retailers were banking on Christmas to get them through.

But, the cashflow from the seasonal trading might not be enough to ride out the multifaceted costs they faced.

"The cash they have got is catch-up cash and they may be stretched. It will be a difficult three months; there's going to be some damage, I don't see any way around that."

- © Fairfax NZ News