In March 2020, the Prime Minister announced that the government would be providing finance support for small businesses, guaranteeing 50 per cent of new loans issued by lenders to help SMEs access working capital to help them survive the coronavirus pandemic. Here, we review how the scheme has fared.
When the coronavirus pandemic took its hold on Australia in March 2020, the federal government and the lending industry came together to help support small businesses keep the lights on. After lockdowns were introduced and many businesses shut up shop, lenders were (unsurprisingly) hesitant to offer credit to businesses whose cash flow had come to a grinding halt with no idea of when they would be able to get back to normal levels.
The ‘unprecedented’ movement restrictions had many concerned as to how the 2 million small businesses – many of whom relied on foot traffic – would survive, and therefore what the medium-term impact would be on the economy. As such, the government teamed up with lenders to offer small businesses the option to defer repayments on their existing loans, and set up a new solution to help them access credit to pay staff, rent and bills: the Coronavirus SME Guarantee Scheme.
The scheme aimed to “enhance lenders’ willingness and ability to provide credit to SMEs” and aimed to support up to $40 billion of lending to SMEs (with the government guaranteeing up to $20 billion).
Under the first tranche of the scheme – which commenced on 23 March 2020 and closed for new loans on 30 September 2020 – participating lenders on the panel could offer guaranteed loans if they were:
However, unlike other financial support schemes launched (such as the early release of super and First Home Loan Deposit Scheme), the SME Guarantee scheme saw slow take-up. Just 15,600 business loans worth $1.5 billion up to July 2020, according to Treasury figures.
What held phase 1 back?
According to the managing director of finance brokerage Simplicity Loans & Advisory, Matthew Johnson, part of the issue was that there was a general expectation that the money would be made available easily.
Speaking to The Adviser about the first tranche of the scheme, he explained: “The whole point of the loans, I thought, was to help those businesses that couldn’t access finance and were struggling. To make banks more able to loan out money.
“But despite the [economic] uncertainty and need for fast finance, brokers and their SME customers were still being asked for a whole suite of information, almost exactly like we would on a standard loan application – things like historical financial data, two years’ worth of financial statements, management accounts etc.
“It felt like the assessment process was exactly as it would be for a normal application, almost as if the government guarantee wasn’t even there,” he said.
“The issue was that, once we had the list of financial information come back from the lender, the feedback we had from clients was that it was just too hard. They simply walked away.
“So, I’m not surprised that just $1.5 billion was lent out of the budgeted $20 billion [at the time]. It seems that a lot of people might have had that same view.”
Indeed, several lenders questioned the utility of the first phase of the scheme. Some highlighted the “catch-22” whereby banks could access cheaper funding but did not have the risk appetite to lend it on, while non-banks had the appetite and technology to write the loans but didn’t have access to cheap funding - meaning it was too expensive to take part in the scheme and offer the (mandatory) six-month repayment hiatus.
Speaking to The Adviser in December, the Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, commented: “Mark one of the SME Guarantee Scheme was, we believe, really far too restrictive, and I know many brokers and companies that provide capital felt the same way…
“The problem with mark one was you actually couldn’t make a payment for six months, which was a huge problem for the fintech lenders, for the balance sheet lenders. In fact, it was a real problem for everyone really, [but] maybe the banks with access to TFF were in a bit better position.”
However, major banks also noted that the scheme was not always an appropriate measure. In September 2020, NAB CEO Ross McEwan told the House of Representatives standing committee on economics that the bank had approved fewer SME Coronavirus Guarantee Scheme loans than overdraft or short-term credit arrangements.
According to Mr McEwan, while the bank had around 20,000 calls about the scheme when it was first announced, “a lot of them thought it was free money and that they didn’t actually have to pay it back. That certainly finished the conversations off quite quickly [when they understood that it wasn’t the case],” he said.
He added that many borrowers had opted to take an overdraft as it not only provided faster access to credit, but also meant that the payback period (and therefore the cost) was less.
“Instead of taking a three-year loan and being caught in the three-year loan, [they could use] something they could pay off in three months,” he said.
“When the SME Guarantee Scheme didn’t take off like everybody thought, [people] were saying, ‘What’s happening? Why aren’t [SMEs] using it?’ You can’t be lending to them. But… there are a number of facilities that the customer has today that they can use that may be better than an SME Guarantee Loan for three years. So, what is best for the customer is what we have been working on,” he added.
How the new phase is different
The detractors were listened to, though, it seems. In September, the government announced that the scheme had gone through a reboot for the second tranche, in a bid to provide greater utility and “meet the evolving needs of SMEs”.
The expanded scheme aims to shift the priority away from providing access to working capital to help businesses stay afloat during the crisis to helping them access more affordable and longer-term credit so that they can prepare and invest for the future.
On 1 October, the new phase opened, quadrupling the maximum loan size from $250,000 per borrower to $1 million per borrower, allowing secured products and increasing from its current three-year limit to five years.
Under the new phase – available for loans made by participating lenders until 30 June 2021 – SMEs are now able to access the scheme to use loans for more than just working capital (so that a wider range of investment can be funded) and secured lending will be permitted (excluding commercial or residential property).
Importantly, it is now up to the discretion of participating lenders should they wish to offer a repayment holiday period.
The new phase has seen more non-bank lenders joining the panel and offering new products to SMEs. One such lender is specialist lender TrailBlazer Finance, who has now released a new product specifically for the program, a low-rate Small and Medium-sized Enterprise Government Guarantee (SMEGG) loan.
Jeff Zulman, managing director of TrailBlazer Finance, commented, “As a specialist SME lender, we are all too aware of how much of a toll 2020 has taken on many small businesses.
“We are proud to have been selected as a participating lender in phase 2 of the Government SME Guarantee Scheme, and even prouder that it enables us to provide a new low-rate funding option to the white-collar SMEs we serve.”
TrailBlazer’s new loan aims to help small businesses with recurring revenue streams – such as mortgage brokers, financial planners, real estate managers and accountants – with their cash flow.
Offering loans between $75,000 to $1 million to those with an annual turnover of less than $50 million, the SMEGG loans start from 9.99 per cent and can be used for a broad range of business purposes, be it working capital or investing for growth.
Mr Zulman added, “The new loan product further strengthens our offering for small businesses at a time when many need the additional cash flow buffer. As always, TrailBlazer Finance is committed to delivering the best possible solutions for these white-collar professionals.”
While initial figures are yet to be released from Treasury as to the number of loans so far written under the second phase of the scheme, the Commonwealth Bank of Australia revealed in February that it had lent $1.1 billion across 12,100 SME Guarantee loans up to December 2020 (estimated to be approximately 50 per cent of all SME Guarantee loans issued to businesses across Australia).
As such, it is expected that the second phase will have greater uptake and help more SMEs than the first. As the ASBFEO said: “Mark two, which has started now, is better… The new loans can be secured or unsecured. The first tranche was all unsecured. So, this is much more flexible and certainly worth having a look at.”
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.
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