Some businesses on the brink may be excluded from the second phase of the coronavirus SME Guarantee Scheme — which is expected to accelerate the take-up of the $40 billion program — by the introduction of a 10 per cent interest-rate cap.
Experts say those seeking shorter-term credit to invest in the fit-out of a cafe or restaurant or the IT needs of a small business may be excluded under the revised scheme while forecasting a flood of financing for company cars.
Treasurer Josh Frydenberg, who announced the scheme in March in an effort to shore-up the flow of credit, said the scheme had been tapped by almost 20,000 businesses during the first phase and was being tweaked to meet longer-term objectives.
“To ensure [small and medium enterprises] continue to benefit from cheaper credit, phase two of the scheme will include restrictions on the interest rates that can be charged by participating lenders,” the Treasurer said.
“As we make our way through the recovery phase, the expanded scheme will provide longer-term support through cheaper credit to help businesses get back on their feet.”
Diane Tate, the chief executive of Australian Finance Industry Association which represents more than 100 non-bank and specialist lenders, says phase two of the scheme is a big improvement but the 10 per cent cap on interest rates will limit eligibility.
“If you’re a manufacturing, mining, construction, transport or agriculture business who wants to use, say a three- or five-year loan to purchase a motor vehicle or other high-quality assets, this is good news,” Ms Tate said.
Out of scope
However, sectors such as retail, hospitality, tourism will not be so lucky. These sectors, which are among those hardest hit by the virus crisis, typically use more specialised credit products over shorter terms with higher rates and will see loans, assets and borrowers fall out of the scheme’s scope.
“For example, fit-outs for restaurants, cafes or event spaces, some equipment used in gyms, and some IT equipment frequently used in offices in our cities and regional centres, will likely be out of scope,” Ms Tate said.
Under the first phase of the scheme announced in March, the loans, which were 50 per cent backed by the government, needed to be unsecured, no larger than $250,000 for up to three years with a mandatory six-month payment holiday to be eligible.
The scheme was plagued by poor take-up and less than $2 billion of the $40 billion allocated was approved for payment.
A spokesman for the Australian Banking Association says banks have loaned Australian businesses another $36 billion on top of the $2 billion they have accessed through the SMEG since the pandemic began and stood ready to support Australian businesses.
Under phase two of the scheme, which begins today, the loans may be secured and the mandatory payment holidays are gone.
The maximum loan size has been increased to $1 million with terms of up to five years and a 10 per cent cap on interest rates charged above the bank bill swap rate has been introduced.
The introduction of the cap has been controversial because it sidelines lenders who deal with higher-risk borrowers with higher funding costs.
It follows complaints from non-bank lenders such as Firstmac who say the Reserve Bank’s pool of cheap money discriminates against non-banks and risks eroding competitive gains that have taken a generation to establish.
However, some lenders have been buoyed by the changes to the SME scheme.
SME lending specialist Judo Bank has written $2.2 billion in loans since it was established in 2016, but under the first SME loan scheme it wrote just 30 loans worth $6 million. Co-founder and co-CEO Joseph Healy is aiming to write 50 times as much business under phase two.
“We have set ourselves a target of $300 million,” Mr Healy said.
Judo says the 50 per cent government guarantee allows it to shave around 100 to 200 basis points — one to two percentage points — off the cost of the loan. Mr Healy supports the 10 per cent cap on interest rates, saying the government should not have to support lenders charging rates in the high teens and beyond.
“Those lenders, they can continue to lend at those rates if they can but they shouldn’t be able to so with the 50 per cent government guarantee. It doesn’t stop them from lending. The 10 per cent limit gives lenders ample room to operate,” Mr Healy said.
Tradeplus24, a fintech that specialises in loans between $500,000 and $10 million, was unable to meet the strict criteria of the first phase, but has signed up for the second phase following a relaxing of the conditions attached to the scheme.
Managing director Adam Lane said the decision to do away with the mandatory six-month repayment holiday and raise the maximum loan size from $250,000 to $1 million would ensure the scheme appealed to a broader range of lenders.
“For all of these reasons, we, like many others, did not register for the scheme when it was first introduced. But now with the new changes to the scheme, we are really excited to get involved the second time around”
Get Capital chief executive Jamie Osborn said the success of phase two could be measured by how much of the $40 billion is allocated by June 30 and by the range of lending products it is used to fund.
“A bad result would be if the program gets utilised in products and credit segments where there is already strong credit supply like prime credit asset finance and not applied to segments and products where there is very tight credit supply like unsecured lending,” Mr Osborn said.
“What you don’t want is for the SMEG 2 program to distort the market. I suspect that Treasury will be reviewing the lender reporting on SMEG 2 closely and I hope that if distortions start to appear, they can make adjustments to the program accordingly.”
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