As each day passes, we are another day closer to making it through the shutdown of businesses and returning to normal business conditions. From this point on, businesses will then be hard at work dealing with the impacts that shutdowns and restrictions have had on their business. The good news is there is significant amounts of stimulus and cash being injected into the economy, to the tune of $220 billion once you factor in payment holidays by the lenders and stimulus packages announced by the Governments. All this cash has to go somewhere and so there should be good opportunities available.
Government Guarantee SME Business Loan Scheme
As a part of its stimulus packages, the Federal Government announced that it will guarantee 50% of unsecured business loans up to $250,000 to SME’s. Why was this necessary? Two Reasons: Access to Credit for SME’s (pretty obvious) and Reduced Cost of that Credit.
1) Access To Credit:
The Government realises that with the majority of businesses either shut down or restricted, revenues are going to be significantly reduced. Unfortunately, fixed costs within a business stay the same so there is going to be obvious pressure on the owners to be able to fund those costs without the same revenue coming in. Various stimulus schemes have been announced (Visit our Business Resource Page for more info) to provide cash flow assistance to businesses. For more substantial cash injections to working capital, the owner will need to either utilise existing cash reserves or borrow the funds to get them through. As a result, this scheme is being introduced to make business funding as accessible as possible.
Even prior to the royal commission, SME’s access to business loans through the banks could be described as challenging. If a business owner doesn’t have a property to offer as security or haven’t been trading for more than a couple of years, access to credit through traditional lenders is restricted. Whilst the banks are introducing new products to bridge this gap, on the whole, business loans still revert to requiring property security.
Needless to say, this got more challenging in the lead up to and following the royal commission which essentially created more regulation that lenders need to abide by before providing a loan. This, in turn, makes it more difficult for businesses to qualify and meet those requirements. This is exactly why online business lenders or ‘fintech business lenders’ have seen such impressive growth recently. There is a real need and demand from SME’s for capital to fund their growth. These lenders have a streamlined, online application process and utilise recent bank statement data to provide decisions on unsecured business loan applications up to $100,000 within 24hrs. As a result that they increased the availability of credit to SMEs. (Although there is a definitely need and purposes of these loans, they are more expensive compared to bank finance.
By the Government providing a guarantee to the banks for 50% of the business, loan amounts up to $250,000 they are providing security (that many SMEs don’t have available to offer) for the lenders to be able to reduce their credit risk on a loan and be more comfortable to approve a loan.
Government Guarantee SME Business Loan Scheme + RBA $90 Billion Support for Banks
2) Reduced Cost of Credit:
Any business finance provided is priced based on the risk of the individual transaction. Loans that are secured by an asset will receive a better interest rate. The better that security the better pricing that is provided. For example, a business loan that is fully secured by a residential property will get a better rate (typically) than an equipment loan secured by a vehicle. The reason being that in the event of a lender needing to sell that asset due to borrower not making payments, they need to consider how much they can get for the asset to clear the amount owed. Residential property is much easy to determine a market value and sell then a vehicle might be.
Unsecured finance then is the riskiest. In the event of collection activities, the lender has no way of selling an asset to get their lent money back. As a result, lenders are more cautious in providing unsecured business loans and they charge a much higher rate of interest on these loans to cover the additional risk. Quite often it is the small business owner that needs an unsecured loan and they are typically the least capable in affording the higher interest rates as they try to grow a business. Higher costs of funding impede this.
As a part of the stimulus schemes announced, the RBA is providing a funding facility ($90 billion) at a fixed rate of 0.25% to banks who provide credit to small and medium-sized businesses. This measure, in conjunction with the Federal Government’s scheme of providing $15 billion to small lenders, is all aimed to ensure lenders to SME’s are encouraged to lend and are able to provide significantly reduced interest rates for these Government Guaranteed SME loans and also existing business loans (for clients with total lending under $3 million). There have also been relaxation on the responsible lending rules to SME’s, it remains to be seen how this will translate to lender policy.
Are the lenders offering these Government Guaranteed SME loans now?
The simple answer is yes, although specific details in terms of how loans will be assessed are still largely to be communicated. ANZ is expected to announce further details today. Having only been announced less than a week ago, it is still very early days and we will continue to update as more details come to hand. These loans will have the following eligibility:
- Open to businesses with annual turnover of less than $50M
- Business is located and operates in Australia
- Your business has existing business lending of less than $3M
- You can only use the loans for current and expected cash flow needs. 3
- No refinances
- The loans can only be used for business purposes
- You can only get one loan through one lender, no multiple facilities or lenders
We expect the greatest appetite initially will involve the banks providing loans to their existing clients given the history they have on a business. As is to be expected, any application will involve the lender wanting to understand the current impacts to the business, what contingency plans they have in place and then expected trading position after the restrictions are lifted. Also, an important note for borrowers is that these loans will also have an offer for the first six months of payments to be deferred so funds can be accessed now and repayment starts at once business trading is restored.
Current Lender Support Announcements
In addition to the ability to request payments to be deferred for three to six months on existing business facilities, the main business banks have announced the following additional support and interest rate reductions:
|Lender||Business Overdraft Facilities||Small Business Loans (linked to cash rate)||Merchant Terminal Fee Waivers||Other Assistance|
|NAB||2% rate reduction on QuickBiz Overdrafts from 30 March||2% rate reduction on QuickBiz Business Loans from 30 March||Yes – up to 6 months (including HICAPS)||N/A|
|ANZ||N/A||0.25% rate reduction on small business loans from 27 March||N/A||Temporary Overdraft Limit increases for 12 months|
|Westpac||2% rate reduction on new and existing customers from April 6||1% rate reduction on new and existing customers from April 6||Yes – 3 months||N/A|
|CBA||0.25% Reduction on new and existing customers from 24 March||0.25 reduction on new and existing customers from 24 March||Yes – 3 months||Waiver of early redraw fees on Business Term Deposits|
|St George||2% rate reduction on new and existing customers from April 6||1% rate reduction on new and existing customers from April 6||Yes – 3 months||N/A|
Where To From Here?
One of the most important eligibility points listed above is that you can only get one loan, one lender. Business lending can be complex and there is a large amount of different aspects that are taken into account when a business loan is assessed. One of the advantages clients gain when using a Commercial Broker such as Edgeview Finance is we are able to review your position and application before it is submitted to any of the lenders. This creates a number of advantages for the business owner wanting to access a business loan:
- Get an expert to review your position upfront without credit checks being done
- We have relationships with all the lenders. We have direct access to the right people at each lender to get quick responses
- Based on our inside knowledge and experience we will ensure your application goes to the lender that best suits you and your business
- We work with the client to put an application together so that it is viewed in the best possible light at the time of assessment
- You don’t have to spend hours dealing with lenders, we do it all for you
Even if you have a question about your current business finance needs, an existing facility or potential need for cash flow funding please get in contact. We have over 25 different commercial and equipment finance lenders, including all the main business banks.
Want More Resources for Business Owners related to Coronavirus (COVID-19)
View our dedicated Coronavirus (COVID-19) Business Resource page here