Depressionberg’s SME Guarantee Scheme appears to be a joke

It was announced with great fanfare:

The Coronavirus Small and Medium Enterprises (SME) Guarantee Scheme will support up to $40 billion of lending to SMEs (including sole traders and not-for-profits).

Under the Scheme, the Government will guarantee 50 per cent of new loans issued by eligible lenders to SMEs.

The Scheme will enhance lenders’ willingness and ability to provide credit, supporting many otherwise viable SMEs to access vital additional funding to get through the impact of Coronavirus.

The Scheme will be available for new loans made by participating lenders until 30 September 2020.

Channeled through the banks, Evil Anna was jubilant:

“It’s important that small businesses across the country are given a lifeline to get them through the difficulty wrought on the economy by the COVID-19 pandemic.

“Banks stand ready to help their business customers get through this, whether it’s deferring their loan payments or providing more working capital.

“Today’s announcement of a second stimulus package, which includes an SME Guarantee scheme, will mean access to funds to see small businesses through this downturn.

I know a small businessman that applied for the scheme a month ago with two banks. So far he has seen:

  • an initial request for material proving eligibility;
  • a second request weeks later for material pertaining to director guarantees meaning the scheme somewhere mutated into a partially secured loan;
  • no returned calls and not even a request for an application.

The banks have shown no interest if getting the loan up. Either because they are inundated or they don’t want to do it.

Either way, it’s not very good as stimulus is it? Especially so given SMEs have no access to capital markets.

Wondering if others have seen the same.

David Llewellyn-Smith
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Comments

  1. Maybe the problem is the Government will guarantee only 50 per cent of new loans. Arnt banks used to having better security over loans. Have they not in the past preferred to lend to real estate objectives thinking they have minimal risk as opposed to an actual productive enterprise of some kind which in their minds is not a risk worth taking unless the loan is backed up by real estate collateral. I doubt the banks are interested in lending in this scheme at all.

    • happy valleyMEMBER

      Can’t remember but did the UK government end up guaranteeing 100% of the loan under a similar scheme? The US has apparently been a bit of a corporate rorters paradise with some of the first round US$350bn going to big boys?

    • Almost all SME loans in Australia are RE mortgages (loans secured by a property).
      No thinking…

      • tonyddMEMBER

        And how many have already tapped out the equity mate. What SME sectors will survive this and what percentage of them will become redundant.

      • DominicMEMBER

        Yes, the security is the issue. There is likely already a lien on the assets that matter – mainly property. And those businessmen who never wanted their personal assets at risk Likely won’t want to do so now.

        Another half-baked scheme that the banks don’t want a bar of either as the risks are just too high. The 50% the Govt is guaranteeing is not a first-loss piece. It’s straight up shared risk.

        • Absolutely. Have not as yet seen or heard of a single dollar flowing – CBA continue to be the worst to deal with and interestingly BOQ and Bendigo so I am told the best. As Dominic notes in many SME / Micro the issue is that they have for eg used their residential mortgage to fund a business (not the best but people do what they can when in small biz) and banks now not assisting. They have closed all (including the SME loan scheme) so I hear close to the ground, from tourism hospitality and many retail. Almost impossible to get in the much needed industries. The bnks view they are basically a bad debt notwithstanding supposed govt backstop. It was dead to start and will get worse once JK etc ends …

          Lets see. Liklewise interested to hear if anyone has other stories (esp positives)

  2. Loans for business? Huh? If it’s not a residential mortgage, don’t talk to me.

    • happy valleyMEMBER

      Absolutely. If a banker (if they don’t have a mortgage broker to do their work for them), has to put more than 5 minutes in to the credit assessment (residential property lending is a no brainer as houses always go up in value), then forget it. LOL?

  3. Looked at work required to get the loan, and what it could and couldn’t be used for, as well as material required to facilitate a potential audit down the track… and didn’t bother applying. Don’t quite need it yet. It’s a lot of work.

    • happy valleyMEMBER

      Sounds like JobKeeper – designed to fail? More smoke and mirrors from SFM and his apprentice, Josh Rainbowberg?

    • Arthur Schopenhauer

      Looked like smoke and mirrors to me.

      JobKeeper is also a pain to get if your company has a lumpy month to month cash flow. It’s really designed for sandwich shops and hairdressers.

      And then there’s the Covid App that cannot work on iOS as advertised, due to a number of inherent qualities of iOS. Complete Bolshevik that it worked at all. Doubt the data privacy is any different.

    • Andy McPherson

      Cheer up – you wouldn’t have got it anyway. A close relative works for a big 4 in commercial loans. They’re sitting on the money, or only loaning out 10% of what was asked for. They don’t want more risk.

    • thats the other issue (s) – the red tape and the restrictions have a number of clients (via accountant referrers) telling me they not using … for this reason.

  4. jgmellMEMBER

    Same for me. Our bank has been ridiculously slow. We’ve tried others but they are just as bad.

  5. Banks know we are on the precipice………..they know the real state of their balance sheets. Some real root and branch work lies ahead and there is no sign of anyone with the stature to undertake it. Richard Murphy lays out the reality

    https://www.nakedcapitalism.com/2020/05/people-and-jobs-or-wealth-the-government-has-to-decide-which-to-prioritise-and-there-is-only-one-right-answer.html

    Once the fake real estate valuations go all that debt is nothing but a millstone, not an income stream.

    • PeachyMEMBER

      That’s why the valuations can’t “go”.

      Why convert lovely comfortable income streams to millstones? Nobody wants that, right?

      • DominicMEMBER

        We’ve been through this before – it is not in the gubmint’s power to maintain the status quo, to keep it all propped up. Certainly not in the presence of the current sh1tshow.

        • PeachyMEMBER

          Have you not seen that they can create hundreds of billions of dollars overnight? And how this meets with approval in the population?

          They have the power to maintain nominal valuations. I’d say they are inclined to use it.

          • DominicMEMBER

            Without the facility to inject it directly into the property market the only beneficiaries tend to be financial securities.

            Literally the Govt would have to under-write a sub-Prime mortgage operation to get the funds where they want/need them to go.

            The other option is to induce high / hyper inflation — that would certainly float nominal values.

          • As you can see from your short post, Dom – the solutions write themselves. This stuff is easy.

    • codeazureMEMBER

      Very thought provoking, thanks for the link. He may be completely wrong, but it’s worth considering what he says. Certainly, his point about businesses facing long term drops in demand and income versus fixed running costs is a worry.

  6. BenjaminHDMEMBER

    Our business is well-positioned to get going on the “other side”. We have an 8-year history with the bank, good results during that time including consistent growth. We’ve never missed a beat with our business banking. We generate >$50,000 per annum for the bank in fees including merchant fees.

    Our personal banking including home mortgage is with the same bank. So they already have PGs from my wife and me along with my family home as security on our existing lending.

    We went to our bank to shore up our working capital.

    The response included what is set out below. They have basically said they do not want to lend this money. These loans are to be the last resort after I’ve burned my staff, my landlord and my creditors. Not exactly useful if every business in the economy does all of this.

    “… to ultimately consider providing support it is a fundamental part of the application process that you are able to clearly demonstrate the amount of assistance required including what the funds will be used for and expected repayment source to support the business through the COVID -19 impacted period.

    Thank you for your explanatory notes and data provided; you will also need to provide specific details (calculations) of actual COVID- 19 expense impact that is unable to be supported by utilising your own resources in the first instance.

    Q . What are the specific financial impacts of COVID-19 on the business performance on a per month basis over the next 6 months?

    Impacted sales and to what degree
    Impact on collection of debtors
    Impact on expenses

    Q What are your strategies to manage the cash flow and business operations over the next six months?

    Reducing Costs
    Access to various forms of aid
    Cash and other liquid
    Alternative revenue sources

    Q. Have you requested and/or received any other COVID-19 relief?

    Extended repayment terms on any other obligations
    Government support, etc)

    Thought the following maybe a helpful guide in determining the gap between expenses and revenue and ascertaining amount of support required:

    OPERATING EXPENSES PER MONTH
    Less – Interest which should be deferred 6 months using deferment process
    Less – Rent, should have arrangement with landlord or if loan with NAB payments deferred
    Less – Wages adjustments, staff reduced rates etc
    Less – Other reductions (please provide additional detail)
    Less – Other adjustments (eg variable costs, advertising, marketing, donations)
    REVISED EXPENSES PER MONTH

    REVENUE PER MONTH
    Less Reduced Sales XX% – provide how much has revenue decreased in percentage and dollar value
    Plus Govt Jobseeker per month
    REVISED REVENUE PER MONTH”

      • That might indeed be necessary, but IMO one of the most useful things we could do (easily, APRA could do this with the stroke of a pen) is to increase the regulatory capital requirements for mortgages.

        If bank executives succeed and fail by their organisation’s RoE than of course they will put all emphasis on mortgage lending.
        It is easy (credit assessment is dead easy, check their Experian file and you’re done), scales well (loan size is massive compared with tiny operation costs, a lot of which is automated) and delivers high RoE (decent margin plus very low equity/capital requirement).

        By way of comparison, lending to small business is hard (credit assessment is tricky, need to understand business and its financial statements), scales poorly (operationally intensive compared with loan size) and delivers mediocre returns (equity/capital requirement much higher than mortgages, unless you get the borrower to stump up their house as collateral).

  7. Bertrand Russell

    I saw this addressed recently – can’t remember where, will dig it out. Basically the banks are looking at viability of businesses post recovery and basing their assessments on that.

    Unless the business is doing well NOW the banks view it as unlikely to succeed and will not lend. The businesses doing well NOW generally do not need the loans.

    Therefore no loans are being made.

    Answer this basic question – do you think the bank will lend to a business it thinks will not be able to pay the money back ?

    There’s your answer.

    • PeachyMEMBER

      It’s just standard lazy banking.

      The people that don’t need a loan can borrow if they wish. They are safe credits.

      The people who need a loan obviously don’t have enough money, so why lend to them? That’s risky. They are bad credits.

  8. It’s all about cashflow at the moment. There’s no demand for credit, guaranteed or not.

    The economy’s utilisation of capacity has plummeted and it wont be back, for many years. Investment for expansion makes no sense.

    Futher that, (without knowing the detail) eligibility criteria would be crafted to ensure that the banks dont just effectively shift their garbage loans onto the taxpayer. Low demand for this program is probably a good outcome for taxpayers, bad news for bank shareholders.

  9. Wasn’t there a need to grow the business loans book by a certain amount (3% jumps to mind) a prerequisite for accessing some of the 0.25% money from the RBA? Perhaps the banks are aware that they will meet this hurdle simply by allowing existing loans to defer repayment and capitalising the interest, so not much need for new loans.

    I guess too the banks have had to do next to no actual credit analysis for years (as SME lending was always asset backed) so good luck to them ramping up approvals of unsecured loans. Their bankers wouldn’t know one end of a cash flow statement to the other.

    • The RBA’s Term Funding Facility (TFF) has two main parts:

      (1) All banks were given an ‘Initial Allowance’ equal to 3% of their credit outstanding at the end of December
      (2) Banks could create an ‘Additional Allowance’ by increasing their Corporate credit outstanding (with a 1 to 1 benefit, that is, for every $1 of increase you get $1 ‘Additional Allowance’) or SME credit outstanding (with a 5 to 1 benefit, that is, for every $1 of increase you get $5 ‘Additional Allowance’).

      Banks can use their ‘Allowance’ (i.e. Initial + Additional) to draw down funding at 25bps for 3 years from the RBA, in exchange for ‘repo eligible securities’ (which in most cases I think will be securitised mortgages).

      As alluded to elsewhere, the problem is that most of our banks have been able to get fat and lazy by writing mortgages and getting an RoE of 15%+ without even trying. The credit assessment process is to make sure you exist and don’t have a terrible credit score with the likes of Experian.

      By way of comparison, writing loans to business is hard and will drag down RoE.

  10. SnappedUpSavvyMEMBER

    If your eligible then your obviously not viable and your viable your not eligible so fck off

  11. I’m not normally a advocate of banks but in this case I think both they and the government have got it right. We employ 38 people. $3m per year payroll approx. We have taken appropriate steps with staff salaries and expense structures then modeled this for 15months to 30 June 2021 in profit/loss and cash flow. The lowest our cash balance reaches is about $560k. We wanted a $600k facility for back up. Our bank (ANZ) had specific Covid products that wouldn’t ordinarily be available. They asked for the information that you would expect a bank to ask for. The government is guaranteeing 50% but the bank is still on the hook for 50%. My business partner and I do not provide and never have provided bank guarantees or property security. I think the sharing of liability between the bank and government is correct because, otherwise, the banks would simply be the distributors of easy money. The distribution of loans still needs consideration. Just that it is easier for the banks to give it out with 50% covered off. It is correct for the banks to ask for detailed information on the business projections and measures taken. Any business person that can’t answer these questions easily doesn’t deserve the money. Providing security doesn’t replace that communication of information. Allowing distribution of loans simply based on security is exactly the type of corrupt lending practices the banks (have rightly) been accused of in the royal commission. Based on my experience, if a business can demonstrate a path through this period then they will get the backing from the banks. If they can’t demonstrate then they won’t…and in my opinion that’s responsible lending.