The Federal Government’s SME Recovery Loan Scheme

In an effort to reduce the economic struggle caused by the covid-19 pandemic, the federal government has announced an extension of its small and medium-sized enterprise loan scheme.

Following the conclusion of JobKeeper the government will continue to work with lenders to offer assistance to Australian businesses who are still in need of access to financial support to grow their businesses and make a full recovery from the impacts of the covid-19 pandemic.

The SME recovery loan scheme will be an adaptation of the SME Guarantee Scheme which was introduced in March 2020. The scheme provides loans of up to $5 million, 80% of the loan is guaranteed by the government and 20% is paid by a participating bank.

The original Guarantee Scheme was introduced under the “The Coronavirus Small and Medium Enterprises (SME) Guarantee Scheme” on 23rd March 2020 to assist businesses with re-opening. Under this initiative the Australian government introduced support up to $40 billion of lending to SMEs by guaranteeing 50 per cent of new loans issued by participating lenders to SMEs.   

This scheme has been considered a success as it enhanced lenders ability to provide cheaper credit, thus giving many otherwise viable SMEs access to vital additional funding in order to help their business make a successful recovery from the impact of covid-19 restrictions and have more financial support to invest for the future.  

To be eligible for the new scheme, businesses must have received JobKeeper between January 4 and March 28 2021, and must a turnover of either $250 million or less. Self-employed workers and non-profit businesses are also eligible for the loan.

Businesses can use the loan to support investment or refinance pre-existing debt which includes debt from the original SME guarantee scheme.  The loans are also eligible to be used to purchase a commercial property or to purchase another business. The scheme cannot be used to purchase a residential property, financial products or lease, hire, rent or purchase existing assets that are more than half-way into their effective life. 

The loan will be available for a term of up to 10 years and will include an option for a repayment holiday period. Banks’ lending the money to the borrowers can offer the business a repayment holidays of anywhere up to 24 months.

The loans that fall under this scheme must be approved before 31 December 2021. The interest rate applied to the loans will be decided by the lenders. The interest rate will be set at a cap of around 7.5%. The federal government has revealed that there will be some flexibility available for interest rates on variable rate loans to rise, if market interest rates increase in the future. 

Show Starter Loans Scheme 

In a bid to boost the creative economy, the federal government has announced a $250 million Covid-19 Creative Economy Support Package which includes a $90 million Show Starter Loans Scheme.  These much-needed support packages will be delivered as part of the Coronavirus SME Guarantee Scheme. The Federal Government will guarantee 100 percent of the loans amount. 

These concessional loans will be a huge benefit to Australia’s creative economy. They will make it possible for entertainment practitioners to fund new events and productions which have been difficult to orchestrate since the beginning of the covid-19 pandemic.  

Quick and efficient access  

The federal government is also offering a temporary exemption from responsible lending obligations for lenders who offer credit to existing small business customers. This new reform will enable small businesses to access credit quickly and efficiently.  

This exemption will be made permanent as part of a broader package of reforms to Australia’s lending laws, this came into effect on 1st March 2021. This will remove the ambiguity in lending laws to enable small businesses get access to credit simpler and faster. 

Reserve Bank of Australia – supporting the flow and reducing the cost of credit 

On Thursday 19th March 2020, The Reserve Bank of Australia (RBA) announced a package which has consequently placed downward pressure on the borrowing costs for households and businesses. This has assisted with mitigating the adverse consequences that covid-19 has had on businesses and support their day-to-day trading operations. The RBA believes that supporting small businesses is a major priority. 

The RBA has established a term funding facility for the banking system. This means that banks can access a maximum of $200 billion in funding at a fixed interest rate of 0.25 percent. This will reinforce the advantages of a low cash rate by reducing funding costs for banks, this will help lower interest rates for borrowers. To encourage lending to businesses, the facility offers additional low-cost funding to banks if they increase their business lending, with particular incentives applying to new loans to SMEs. 

On top of this, the RBA has introduced a further easing in monetary police by decreasing he cash target rate to 0.25 percent. It is has also extended and complementing the interest rate cut by taking active steps to target a 0.25 percent yield on 3-year Australian Government Securities. 

Support for non-ADI and smaller ADI lenders in the securitisation market 

The federal government is offer the Australian Office of Financial Management (AOFM) $15 billion to invest in structured finance markets used by smaller lenders, including non-Authorised Deposit-Taking Institutions (non-ADIs) and smaller Authorised Deposit-Taking Institutions (ADIs). This support measure is being offered via direct investments that provide cheaper funding to these lenders. 

The Federal Government Expands The SME Loan Scheme

Small and medium-sized enterprises (SMEs) are now eligible to borrow up to $5 million dollars as part of the federal government’s decision to expand its loan scheme. The recently announced expansion will be included in the governments post-JobKeeper support package which aims to financially assist SMEs.  

The SME recovery loan scheme will be an adaptation of the SME Guarantee Scheme which was introduced in March 2020. The scheme provides loans of up to $5 million, 80% of the loan is guaranteed by the government and 20% is paid by a participating bank.

The original Guarantee Scheme was introduced under the “The Coronavirus Small and Medium Enterprises (SME) Guarantee Scheme” on 23rd March 2020 to assist businesses with re-opening. Under this initiative the Australian government introduced support up to $40 billion of lending to SMEs by guaranteeing 50 per cent of new loans issued by participating lenders to SMEs.   

This scheme has been considered a success as it enhanced lenders ability to provide cheaper credit, thus giving many otherwise viable SMEs access to vital additional funding in order to help their business make a successful recovery from the impact of covid-19 restrictions and have more financial support to invest for the future.  

To be eligible for the new scheme, businesses must have received JobKeeper between January 4 and March 28 2021, and must a turnover of either $250 million or less. Self-employed workers and non-profit businesses are also eligible for the loan.

The revised loan scheme will offer much needed support to businesses across the country who are part of industries that are still struggling to recover from the impact of the covid-19 pandemic. The scheme will provide businesses with an opportunity to build a bridge to reach the other side of the crisis and to keep their staff employed.

Loans for the scheme will be offered by a participating commercial bank. Both unsecured and secured lending will be allowed under the scheme.

Businesses can use the loan to support investment or refinance pre-existing debt which includes debt from the original SME guarantee scheme.  The loans are also eligible to be used to purchase a commercial property or to purchase another business. The scheme cannot be used to purchase a residential property, financial products or lease, hire, rent or purchase existing assets that are more than half-way into their effective life.

The loan will be available for a term of up to 10 years and will include an option for a repayment holiday period. Banks’ lending the money to the borrowers can offer the business a repayment holidays of anywhere up to 24 months.

The interest rate applied to the loans will be decided by the lenders. The interest rate will be set at a cap of around 7.5%. The federal government has revealed that there will be some flexibility available for interest rates on variable rate loans to rise, if market interest rates increase in the future.

All banks involved in the scheme are required to disclose the effective interest rate, including whether it is variable or fixed, when the borrow agrees to the loan.

During the repayment holidays, interest rates will continue to occur and businesses will have to pay he accrued interest rate back once the repayment restarts.

If a borrower is unable to repay the loan, the bank will follow a standard default procedure. It is crucial that the businesses are aware that it is their responsibility that the loan is repaid at the appropriate time.

If any business borrowing money under the scheme runs into any problems or conflict with the bank lending them the money they are able to submit a complain to the Australian Financial Complaints Authority (AFCA).

AFCA will not be taking into account decisions to lend under the scheme or the amount of a loan. However, AFCA is open to receiving complaints about issues of hardship or enforcement.