Demand for Small Business Loans on the Rise, Fueled by the SME Recovery Loan Scheme

Demand for Small Business Loans on the Rise, Fueled by the SME Recovery Loan Scheme

Vaccines are finding their way into arms at an ever-increasing rate. Daily cases are falling, and the lockdown is lifting in New South Wales.

Amid this, many Australian businesses are betting on a smooth transition to a COVID-endemic world. That’s why they’re seeking out an overview of small business loans in Australia online – they need capital to ramp up their operations and to remain safe from the virus.

But not so fast. Just as NSW is getting it together, Victoria and Canberra are falling back into COVID hell. However, like companies elsewhere, businesses there are also seeking small business loans.

How can this be? It’s simple – whilst businesses in reopened states borrow to pay for launch costs, companies in locked-down states seek funds to stay alive.

Below, we’ll explore how we got here, and why SME finance demand is uncharacteristically high at a time of national crisis.

The Current State of Small Business Loans in Australia

As small business goes, so goes the country. As absolutist as that statement sounds, it’s not an exaggeration – a staggering 99.8% of all Australian companies are SMEs. These businesses employ 40% of all workers and contribute a third of all profits.

So, when a once-in-a-century pandemic shuts it all down, it’s not hyperbole to say that an economic catastrophe could result. What’s more, the pre-COVID landscape, whilst normal-looking on the surface, was a massive disaster waiting to happen.

In 2015, 70% of all SMEs were carrying debt of some sort. From credit card balances to long-term small business loans, most Australian enterprises took full advantage of low-interest SME finance opportunities.

And of course, it wasn’t just the SMEs (and the workers they supported) that were at risk – our banks and private lenders were as well. According to a report by the Australian Bankers Association, financial institutions had more than 261 billion AUD in small business loans on their books in December 2015.

But the situation was even worse than those figures indicate, as they only cover accounts where less than 2 million AUD is owed. So, in reality, the extent of Australia’s small business lending was likely higher that that.

Now, let’s fast forward to the present. Over the past two years, the federal government, through their JobKeeper payment scheme, had committed over 70 billion AUD to eligible businesses. Together with other emergency pandemic measures, the total cost is likely north of 200 billion AUD.

Interest rates are bound to rise soon, with all that money sloshing around the economy. Moreover, with most businesses still owing money from taking one unsecured business loan too many, defaults could spike in the coming years.

For lenders and borrowers alike, the situation is highly uncertain at best. At worst, stormy times lie ahead for the small business lending industry.

The SME Recovery Loan Scheme: What is it, and What are the Terms?

Currently, the government spigots are still wide open. For example, the JobKeeper programme concluded earlier this year, but a new initiative, the SME Recovery Loan Scheme, has taken its place.

Despite appearing similar, this program is a significant departure from JobKeeper. JobKeeper payments were grants to eligible businesses, done with the intent of covering employer wage costs and keeping the consumer economy stable. Meanwhile, the SME Recovery Loan Scheme is meant to encourage banks and private lenders to issue loans.

By doing this, the government is attempting to extend SME finance to eligible businesses whilst reducing gargantuan expenditures related to COVID. When government officials first designed the program, they set aside 40 billion AUD. So far, though, only 6.2 billion AUD has been paid out.

The Terms

To be eligible for this program, applicants must have less than 250 million AUD in annual turnover. In addition, they must be past JobKeeper recipients; otherwise, they must demonstrate they’ve been adversely affected by COVID-19.

Here’s a key aspect of this SME finance scheme – applicants do not apply directly to the government. Instead, they go through a lender (either a bank or a private vendor). If the business in question gets approved, the Feds foot 80% of the loan amount, with the rest coming from the lender. Lastly, loans can be an unsecured business loan or a secured loan. However, in the latter case, residential property cannot be used as collateral.

To be clear, this new initiative has definite pros and cons. Let’s start with the bad news. Firstly, there’s one aspect that appears positive – the repayment holiday provision. Meant to assist with bumps in the road (i.e. sudden, unexpected lockdowns), it allows borrowers can skip up to 24 months worth of payments on their small business loans. However, the invocation of this clause is entirely at the lender’s discretion – they don’t have to show mercy if they don’t want to.

But that’s not the only downside for applicants. Under this scheme’s rules, lenders may charge up to 7.5% annual interest on small business loans. Additionally, if market interest rates increase significantly, the scheme allows variable interest rate products to rise above the 7.5% threshold.

The SME Recovery Loan Scheme has its good points, though. If a business has outstanding debt from any cause (either due to COVID or before COVID), they can use these loans to restructure. So if they have an old unsecured business loan with a high interest rate, they can reduce their burden. And in addition to restructuring, they can also use funds from this scheme to invest in their business.

Finally, the amount of funds available (and the time allowed to repay it) are significant. Through this program, businesses can borrow up to 5 million AUD and take up to ten years to pay everything back.

But We’re in a Pandemic… Why is Demand for Loans So High?

The economic hardships imposed by (necessary) public health measures is undeniable. When businesses can’t welcome foreign tourists, have a packed restaurant, or even open, financial problems will result.

So, then it should be easy to understand the confusion caused by the rise in loan applications. Many people think that robust small business lending only happens during boom times, not in a recession, and certainly not in a pandemic.

But as lockdowns end across Australia, this increase in financing is perfectly logical. With vaccination benchmarks being met, state governments are proceeding with reopening plans. However, after spending months in survival mode, many businesses are strapped for cash.

So, to scale up properly, they are seeking SME finance from the small business lending industry. By securing funds, they’ll be able to rehire workers, restock shelves, and fund marketing campaigns.

But what about places like Victoria and the ACT? In these states, lockdowns are also ending, but at a time when COVID is still running rampant. Because of this, companies there aren’t expecting overwhelming crowds. Instead, many are seeking out small business loans to simply stay afloat.

So, with many SME finance needs to fill, lenders have been doing well lately. Take Nodifi, for example – according to a recent news article, the fintech firm reported a 307% YoY increase in business loan originations. And the Big Four banks have been doing much better than a year ago. In Westpac’s case, they reported 1H 2021 earnings of 3.5 billion AUD in May. That’s more than 350% higher than back in 2020.

How are Small Businesses Planning for the Future?

But as the small business lending industry rakes it in, things are far less rosy for the average High Street business. As mentioned above, many are running on fumes after months of lockdowns. So now, they’re taking on small business loans to restart, with no guarantee of a stable future.

Nobody saw Delta coming. As 2021 dawned, we were told the vaccines were going to stop COVID in its tracks. And to be fair, they continue to be effective against hospitalisation and death.

But thanks to the transmissibility of the Delta variant, outbreaks have even occurred in places where vaccination rates are high. So, what happens if a new variant emerges, one that can largely ignore existing vaccines? Will the government be there for businesses? Or will they be left to fend for themselves?

Prudent owners have begun to take action. First and most importantly, they are shoring up their finances. Before the pandemic, 30% of small businesses had less than three months cash-on-hand. And even with that, many of these enterprises are barely making it. With a less certain future looming, these companies will take every opportunity to increase their cash buffers.

Secondly, these SMEs have found ways to pivot their operations. Take upmarket dine-in restaurants, for example – before the pandemic, offering takeaway would have been unthinkable. But with their fate hanging in the balance, many put together classy take-home boxes, complete with music suggestions.

And thirdly, underconnected businesses have greatly improved their online presence. During lockdowns, consumers had been unable to shop for goods in-store. So, to fulfil their needs and wants, many turned to online shopping.

Facing a massive loss in market share from giants like MyDeal and Amazon, local businesses have had to think fast. By providing loyal shoppers with a way to purchase online, many have ensured their survival.

The Only Certainty is Uncertainty – So Buckle Up

Who thought the 2020s would begin this way? Nobody – and anyone who says otherwise doesn’t know what they’re talking about. So knowing this, how can anyone predict how the near term future will unfold with any degree of certainty?

In this environment, complacency is fatal. With government assistance winding down in the near term, SMEs should make themselves as self-reliant as possible. Actions in line with this mentality include reducing (and ideally, eliminating) debt and regularly conducting worst-case scenario modelling.

By adopting this posture, vulnerable businesses will give themselves a chance to thrive in a highly uncertain future.