Companies react coldly to the SME guarantee scheme against the coronavirus
Less than 5% of the federal government’s $ 40 billion coronavirus small business guarantee program has been used by business owners.
On March 22, the government announced the Coronavirus SME Guarantee Program (the Program). Under this program, the government guarantees 50 percent of loans made by eligible lenders to SMEs. Loans can be valued up to $ 250,000.
The program provides up to $ 40 billion in loans. However, on Tuesday, Parliament received data that only $ 1.7 billion in loans to 17,652 business owners had been approved.
A spokesperson for the ABC pointed out that businesses were reluctant to take out loans.
“Unsurprisingly, given the uncertainty over the timing and trajectory of the recovery, demand for credit has been modest. However, for some businesses, these loans provided the working capital they needed to stay afloat in today’s challenges. “
Related: 6 in 10 Australian SMEs report losses of up to 75 percent
Australia’s small business and family-owned ombudsperson Kate Carnell attributes low participation to economic uncertainty, with many companies reluctant to take on debt.
“Access to finance is critical to the survival of small businesses, especially with a number of supports that are expected to end or start to disappear in the coming weeks,” said Ms Carnell.
“Right now, small businesses are afraid of taking on additional debt because they don’t know what to expect and how any additional bottlenecks might impact their ability to repay their loans.
Related: Australia facing worst economic contraction in history
“An income-conditional loan would work the same as HECS, with small businesses only required to start repaying once turnover has recovered to an agreed level. If income were to fall below this level, payments would cease.
“Even in the best of circumstances, many small businesses are struggling to obtain financing, with a recent Sensitivity report revealing that of the declining number of small businesses that have applied for a loan in the past three months, about one in four has been turned down.
“This research also showed that about three-quarters of the SMEs surveyed reported a drop in revenue, with more than 40% expecting a significant drop in sales.
“Even though the government assumes 50% of the risk under its loan guarantee program, loans continue to go through bank credit assessment processes, which means that small businesses with low revenues. decline have an uphill battle to secure funding.
“Of course, the proposed income contingent loan would require businesses to pass a viability test conducted by a licensed financial advisor.
“An income-tested loan would give small businesses the confidence they need to seek financing to get through this crisis so that they can grow and employ. ”
Which lenders have the highest commitment to the program?
According to Australian Financial Review, Commonwealth Bank and NAB are the main players in the program. Both banks have underwritten 85 percent of all approved loans.
The Commonwealth Bank and NAB pay no commission and both charge 4.5 percent.
A CBA spokesperson told Dynamic Business that despite low demand, the CBA was “very supportive of the SME Guarantee Program.”
“CBA has provided approximately half of the loans available under the program and we have also invested in our digital and technology platform, BizExpress, to make it even easier and faster for small businesses to access SME program loans. Qualifying small businesses can now receive a real-time credit decision and see funds (up to $ 50,000) credited to their account within 20 minutes.
“CBA has now approved over $ 830 million in loans to over 9,000 clients through the government’s existing SME guarantee program.”
However, the interest rates vary for loans secured under the scheme.
Treasury data shows that while the weighted average interest rate is 5 percent, it is far from being applied at all levels.
Some non-bank lenders charge borrowers rates above 18%. For example, Speedy Finance offers loans from 18% per year.
Nevertheless, there are measures that ensure that the additional costs do not fall entirely on the borrowers.
The Term Funding Facility (TFF) is a funding pool established by the RBA to help commercial banks help small businesses.
The RBA announced this week that it will increase the funding available through the TFF from $ 90 billion to $ 200 billion.
TFF provides banks with financing for terms of three years at a fixed interest rate of 0.25 percent. This low interest rate will help lower interest rates for borrowers and encourage business lending.
As of September 1, $ 52 billion had already been withdrawn.
For non-bank lenders, the Australian Office of Financial Management provides access to a $ 15 billion funding pool known as the Structured Finance Support Fund. This will support non-ADIs and smaller ADIs with business loans.
What changes are planned for the Plan?
The first phase of the Scheme ends on September 30, 2020. The Treasury will relaunch the Scheme on October 1, 2020 and will make loans available until June 30, 2021.
As of October 1, loans can be used for a variety of business purposes and the maximum loan amount will be increased to $ 1 million per borrower. The repayment periods will be extended and the loan can be secured or unsecured.
The Treasury is still finalizing the details of the second phase of the program. However, the planned improvements 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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