SME Guarantee Scheme shortcomings lamented

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.

While the scheme will go through a reboot for the second tranche (opening 1 October 2020), there are still concerns that the changes may not go far enough to help those who need it most.

Speaking to The Adviser, the managing director of finance brokerage Simplicity Loans & Advisory, Matthew Johnson, suggested more could be done to improve the system.

Mr Johnson said that while he welcomed the announcement of the scheme in March, the reality of its utility has been disappointing. 

He explained: “We certainly had a spike in inquiry immediately after the announcement in March. I think the perception in the market was that people could almost access this money automatically. That was the way many SMEs understood it and, I think, many brokers probably did, too. So there was an initial rush of inquiry around it when it was announced.

“Unfortunately, our experience was that banks treated the assessment process almost identically to a normal loan application,” he said.

According to the former business banker, despite the uncertainty of how the coronavirus pandemic would impact the economy and a businesses mode of operations, the lenders involved in the scheme (particularly the banks) were applying their usual policies to the Coronavirus SME Guarantee Scheme.

He explained: “The whole point of the loans, I thought, was to help those businesses that couldn’t access finance and were struggling. To make banks more able to loan out money.

“But despite the [economic] uncertainty and need for fast finance, brokers and their SME customers were still being asked for a whole suite of information, almost exactly like we would on a standard loan application – things like historical financial data, two years’ worth of financial statements, management accounts etc. 

“It felt like the assessment process was exactly as it would be for a normal application, almost as if the government guarantee wasn’t even there,” he said.

“The issue was that, once we had the list of financial information come back from the lender, the feedback we had from clients was that it was just too hard. They simply walked away. 

“So, I’m not surprised that just $1.5 billion was lent out of the budgeted $20 billion. It seems that a lot of people might have had that same view.”

While the Simplicity Loans & Advisory MD welcomed the changes for the second tranche (particularly the expansion to investment use and increase to $1 million per loan), he suggested that more still could be done to help SMEs through the scheme.

He told The Adviser: “One of my main concerns with the initial package was that SMEs had to repay the loan in three years (or, effectively, two and a half years), which can be quite a bit of cash flow impost to a business that might still be in recovery mode off the back of COVID. 

“So, I think, moving to five years is positive, but I’d actually be thinking they should be looking at pushing out that loan term even longer to seven or maybe even 10 years, to ease the cash flow burden on the businesses of repaying those loans.”

Mr Johnson concluded: “The ultimate goal here is to get the money out the door to get activity happening in the economy. We need to be encouraging businesses to be going out there and taking on investment and hiring people and trying to expand into opportunities that there will be for SMEs in this next phase of the economy. Even with some pain that we’re going through, there’s always opportunity, so by making it as easy as we can for businesses to take this on, employ people, it’s all going to help the economy recover. 

“With the government guarantee, I think pushing that repayment term out is probably an easy way to make it more accessible for businesses.”

Mr Johnson’s concerns echo those made by several other players in the industry, including the CEO of fintech lender Banjo Loans, Guy Callaghan, who recently stated that SMEs had been left “disappointed” by the scheme due to a fundamental “catch-22”.

“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 told our sister brand Mortgage Business.

“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.”

As such, several non-bank lenders – including Banjo Loans – are now calling for a government-backed initiative that would provide participating non-bank lenders with access to a cheaper funding.

[Related: Government extends Coronavirus SME Guarantee Scheme]