Home Topics Finance Businesses respond coolly to the coronavirus SME guarantee scheme

Businesses respond coolly to the coronavirus SME guarantee scheme

Less than 5 per cent of the Federal Government’s $40 billion Coronavirus SME guarantee scheme has been taken up by business owners.

On 22 March, the Government announced the Coronavirus SME Guarantee Scheme (the Scheme). Under the Scheme, the Government guarantees 50 per cent of loans issued by eligible lenders to SMEs. Loans can be valued up to $250,000.

The Scheme provides up to $40 billion of lending. However on Tuesday, Parliament received data that only $1.7 bn of loans to 17,652 business owners had been approved.

A spokesperson for CBA emphasised that businesses have been hesitant to take out loans.

“Not surprisingly, given the uncertainty about the timing and trajectory of the recovery, demand for credit has been modest. However, for some businesses these loans have provided the working capital they have needed to be able to stay afloat through current challenges.”

Related: 6 out of 10 Australian SMEs report losses up to 75 per cent

The Australian Small Business and Family Enterprise Ombudsman Kate Carnell attributes the low uptake to the economic uncertainty, with many businesses reluctant to take on debt.

“Access to finance is critical to small business survival, particularly with a number of support measures scheduled to end or begin phasing out in the coming weeks” Ms Carnell says.

“Right now, small businesses are scared to take on any additional debt because they don’t know what’s around the corner and how any possible further lockdowns might impact their capacity to make loan repayments.

Related: Australia facing its worst economic contraction in history

“A revenue contingent loan would operate in a similar way to HECS, with small businesses only required to start repaying once turnover recovered to an agreed level. If revenue was to drop below that level, payments would cease.

“Even in the best of times, many small businesses struggle to secure finance, with a recent Sensis report revealing that of the dwindling number of small businesses that applied for a loan in the past three months, about one in four had been knocked back.

“That research also showed about three-quarters of SMEs surveyed reported a drop in revenue, with more than 40% expecting sales to decline significantly.

“Even with Government taking on 50% of the risk under its loan guarantee scheme, loans continue to be subject to bank credit assessment processes, which means small businesses with falling revenue have an uphill battle to secure finance.     

“Of course, the proposed revenue contingent loan would require businesses to satisfy a viability test to be conducted by an accredited financial adviser.

“A revenue contingent loan would give small businesses the confidence they need to seek funding to get them through this crisis, so they can grow and employ.”  

Which lenders have the highest engagement with the Scheme?

According to the Australian Financial Review, Commonwealth Bank and NAB are the largest players in the Scheme. Both banks have written 85 per cent of all loans approved.

Commonwealth Bank and NAB do not pay commission and both charge 4.5 per cent.

A spokesperson for the CBA told Dynamic Business that despite the low demand, CBA was “very supportive of the SME Guarantee Scheme.”

“CBA has provided around half of the loans made available through the scheme and we also invested in our digital and technology platform, BizExpress, to make it even easier and quicker for small business customers to access SME Scheme lending. Eligible small business customers can now receive a real-time credit decision and have the funds (up to $50,000) credited in their account within 20 minutes.

“CBA has now approved more than $830 million in loans to more than 9,000 customers through the Government’s existing SME Guarantee Scheme.”

However interest rates vary for loans guaranteed under the Scheme.

Treasury data shows that while the weighted average interest rate is 5 per cent, this is far from being applied across the board.

Some non-bank lenders have been charging borrowers rates of above 18 per cent. For instance, Speedy Finance offers loans starting at 18 per cent per annum.

Nevertheless there are measures that ensure extra costs do not fall completely on borrowers.

The Term Funding Facility (TFF) is a pool of funding established by the RBA to help commercial banks assist small businesses.

The RBA announced this week that they would be expanding the funding available through the TFF from $90 billion to $200 billion.

The TFF offers banks funding for three-year terms at a fixed interest rate of 0.25 per cent. This low interest rate will help reduce interest rates for borrowers and encourage lending to businesses.

As at 1 September, $52 bn had already been withdrawn.

For non-bank lenders, the Australian Office of Financial Management is providing access to a $15 billion pool of funding known as the Structured Finance Support Fund. This will support non-ADIs and smaller ADIs with on-lending to businesses.

What changes are planned for the Scheme?

The first phase of the Scheme closes on the 30 September 2020. The Treasury will relaunch the Scheme on the 1 October 2020 and will make loans available until 30 June 2021.

From 1 October, loans can be used for a broader range of business purposes and the maximum loan size will be increased to $1 million per borrower. Repayment periods will be extended and the loan can be either unsecured or secured.

The Treasury is still finalising details on the second phase of the Scheme. However the planned enhancements will hopefully improve credit for SMEs.

For more information, visit the Treasury website: https://treasury.gov.au/coronavirus/sme-guarantee-scheme


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Ann Wen
Ann Wen
Ann is a journalist at Dynamic Business with a background in commercial law and research. She is interested in SME tax law, public policy and Australian innovation.