First announced in March as part of the government’s COVID-19 stimulus package, the Coronavirus SME Guarantee Scheme aimed to “enhance lenders’ willingness and ability to provide credit to SMEs” by supporting up to $40 billion of lending to SMEs (with the government guaranteeing up to $20 billion).
Under the first tranche of the scheme – running until 30 September 2020 – participating lenders can offer guaranteed loans if they are:
- Available to SMEs, including sole traders and not-for-profits, with a turnover of up to $50 million;
- Up to $250,000 per borrower;
- Up to three years loan term, with an initial six-month repayment holiday; and
- Unsecured finance.
However, since its launch, only 15,600 business loans worth $1.5 billion have been issued, according to Treasury figures.
Several non-banks have raised concerns over the format of the first round and its unintended consequences on the ability of fintechs to offer loans to the small to medium-sized enterprises (SMEs) most in need.
Speaking to Mortgage Business, the CEO of fintech lender Banjo Loans, Guy Callaghan, suggested that the reason that just 4 per cent of the scheme’s capacity has been issued was due to a fundamental “catch-22”.
Mr Callaghan explained that while he believed the scheme was “a great initiative”, he added that there were teething pains with the first round.
“The only downside was that the government was expecting everybody on the scheme to provide cheaper funding and yet it was only the ADIs (authorised deposit-taking institutions) that had access to cheaper funding,” he said.
“As soon as we got approved for the Government Guarantee Scheme lending panel, we were hammered by people calling up and expecting cheaper loans and the six-month repayment holiday.
“Of course, we had to offer the repayment holiday under the scheme, but we still had the same cost of funds to our funders for that six-month period, even if we weren’t getting any income,” he said.
“So, it caused a lot of disappointment for SMEs who expected that they would be getting business loans with rates of 4, 5, 6 per cent interest rate. But all we could offer was our standard rate, try as we did to work out a way to get the rate down at a discount.
“Unless we wanted to make a loss on each deal, actually losing money, we couldn’t charge anything lower,” Mr Callaghan added.
The Banjo CEO added that this caused particular issues because many of the SMEs approaching non-bank lenders such as Banjo Loans often wouldn’t service with a bank. However, they were then finding the rates charged by non-bank lenders (who tend to price loans on a business’ individual risk profile) higher than anticipated.
“Some of the larger banks have a lot of conditions around who they lend to; they are risk-averse and might only lend to businesses that have been with them for a long time (rather than new customers) and have long turnaround times,” Mr Callaghan told Mortgage Business.
“So, banks have cheaper funding, yet they are risk-averse and are taking forever to turn the money around, and these businesses need it now. Whereas the fintech lenders are very good at assessing SME risk and looking at the businesses in depth and have the technology to turn around deals quickly, but we don’t have access to cheap funding.
“So, I think there are a number of different things that have contributed to mean that the scheme is not successful.”
Second phase welcome, but call for government fund for non-banks
The government recently announced that it was expanding the Coronavirus SME Guarantee Scheme into a second phase to “help businesses move out of hibernation, successfully adapt to the new COVID-safe economy and invest for the future”.
From 1 October 2020 until 30 June 2021, the maximum loan size will quadruple from $250,000 per borrower to $1 million per borrower. The maximum loan term will also increase from its current three-year limit to five years.
SMEs will be 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).
Moreover, it will be up to the discretion of participating lenders as to whether they offer a repayment holiday period.
While the Banjo Loans CEO outlined that the second round of the scheme is “really good”, particularly the move from a mandatory to a discretionary repayment holiday period, he added that it “still doesn’t take away the conundrum for the SME that the funding will still be the same cost”.
As such, several non-bank lenders are now calling for a government-backed initiative that would provide participating non-bank lenders with access to a cheaper funding.
While the government has provided the Australian Office of Financial Management with $15 billion to invest in smaller lenders to continue supporting Australian consumers and small businesses, Mr Callaghan outlined that the Structured Finance Support Fund was only for those small ADIs and non-ADIs that can access wholesale funding markets via a warehouse scheme.
“If you have been approved by government to be a participating lender on the Coronavirus SME government guarantee – and they’ve gone through and looked at the lenders background and done a lot of assessment on them – why not also give all the non-ADIs on the approved list access to a cheaper level of funding?” Mr Callaghan suggested.
“Unless there can be some access for non-bank lenders like us to access some sort of government scheme for cheaper funding, then I don’t think [this scheme] will be the success it could be.
“It will definitely be better [come October] and we are looking forward to the second phase, but until that funding conundrum is solved, it just won’t be as successful as it could be.”
He concluded: “If we had access to a lower cost of funds, then we would be more willing to lend out money, SMEs would be jumping all over it...
“It would mean that we could more readily help ‘the engine room of the economy’, which is so important at this time. Particularly now, with the lockdown in Victoria,” he said.
The Treasury is currently working on the details of the second phase, and expressions of interest will be sought from lenders who wish to participate in the second phase of the scheme in due course.
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.