When Big Girls Don’t Cry founder Karen Edbrooke heard about the federal government’s unsecured loan program she thought her business was an ideal candidate.
The Queensland-based retailer appeared to tick all the right boxes.
It’s a small-to-medium business that’s growing despite the COVID-19 pandemic with a solid credit history to boot. Check, check, check.
But when Edbrooke rang her longstanding banking partner to ask for a loan, they were more interested in hearing about how much her house was worth.
“They never even brought up the unsecured loans,” Edbrooke tells SmartCompany.
“I’m so desperate now that I’ve hired a broker to do all the running around for me and I’m looking at up to 20% interest [per annum].”
Despite the bank’s keen interest in her house, Edbrooke was only looking to take out a relatively small equipment loan worth between $10,000-15,000 to help cover costs associated with bringing on more staff.
As the business owner has previously told SmartCompany, running a growing business during the coronavirus crisis is expensive, with upwards of $50,000 in new costs associated with COVIDSafe measures.
“Even looking to get 10 Apple computers was a nightmare … the banks wanted all my financials up to last week certified from my accountant,” Edbrooke says.
This isn’t how it’s supposed to work, at least not according to Prime Minister Scott Morrison, who unveiled the $40 million unsecured loan program for SMEs earlier this year to improve access to finance for small businesses during the pandemic.
Under the program, the federal government agreed to take on 50% of the risk associated with loans given out by approved lenders, a move intended to encourage banks to ensure credit kept flowing to businesses.
A total of 44 lenders have been approved by the government to utilise Commonwealth coffers for the loans, a little over three-quarters of which are banks.
Here’s the rub: while up to $40 billion in loans were expected, only about $2 billion has actually been lent out so far, according to Treasury, which is currently working on an expanded second phase of the scheme that’s set to kick-off on at the start of next month.
Of this amount, two banks, namely Commonwealth Bank and NAB, are responsible for more than 80% of funds lent out under the program.
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Why did this much-hyped government program only hit 5% capacity in its first seven months?
There appears to be a range of reasons. Those SmartCompany has spoken with have complained about lender reluctance, unpalatable interest rates and, at least according to this anecdotal evidence, lacklustre marketing.
More broadly, bank bosses have pointed to lower than expected appetite among business customers and some brokers say the program itself doesn’t fit the market very well.
“I don’t even own a house”: Have lenders forgotten the ‘unsecured’ part?
Among the half-a-dozen business owners SmartCompany spoke with for this story, all said they were pushed towards putting up collateral for loans when they contacted their banks for credit during the pandemic, before being asked to jump through some onerous disclosure hoops that, at least in one case, extended the loan application process out to seven weeks.
Mobius Distilling Co co-founder Alex Hardie recalls contacting his bank to enquire about the government’s loan program, but was instead directed towards a more traditional option that would have involved putting down a house.
As Hardie tells SmartCompany, “the number one question was ‘do you own a house?'”
“I don’t even own a house.”
Small business ombudsman Kate Carnell has been hearing similar stories from business owners; it appears lenders approved to grant loans under the scheme are neglecting the “unsecured” part.
“I’ve seen small businesses who have dealt with their bank for a long period of time being asked to fill in full-scale personal serviceability requirements for their partners who don’t work in the business,” Carnell has told SmartCompany.
“There’s no doubt this is in conflict [with the purpose of the program], and there’s also no doubt that not much money is flowing out the door.”
Council of Small Businesses of Australia chairperson Mark McKenzie says he’s aware of businesses being pushed into secured loans too, but makes the point that the scheme design isn’t very attractive from a lender point of view.
“If you’ve got a loan that’s not going to work at 100% [risk], it’s not going to work at 50% either,” McKenzie tells SmartCompany.
“We don’t blame banks for the process, they’ve done a phenomenal job really.”
Has poor program design tempered lender gusto?
McKenzie’s point hits at a thread of feedback about the first phase of the loan program that’s proliferated among brokers in recent months.
Essentially, the way the federal government designed the program doesn’t fit the realities of the small business lending market, and this could be leading many businesses to be rejected, or simply not be considered for the program, to begin with.
Throughout the pandemic, survey panels of SME owners have identified worryingly high rates of loan rejections.
Indeed, the latest Sensis Small Business Index, which surveyed about 500 businesses in September, revealed 34% were finding it more difficult to get finance compared to pre-COVID-19 times.
The same Sensis panel in August, which surveyed 1,015 business owners and managers, identified 26% of respondents saying they were knocked back when trying to get a loan in the three months prior.
It appears, at least from the available data, that general lending to small businesses hasn’t picked up over the course of the pandemic either.
That much was the conclusion of Reserve Bank of Australia (RBA) head of domestic markets Marion Kohler, who spoke to the Australian Financial Markets Association earlier this month.
“The volume of lending to SMEs has been little changed since the onset of the pandemic,” Kohler said, identifying a potential reluctance among businesses to take on debt, and caution from banks.
This is despite the RBA outlaying billions of dollars in a COVID-19 term funding facility to lower small business borrowing costs for banks. So, what’s the hold-up?
Well, at least as far as the government’s unsecured loan program goes, Archer Mortgage Group finance broker Jasjeet Makkar says the loans aren’t really fit for purpose.
Makkar has been working with dozens of SME clients to get their loan applications over the line during the coronavirus pandemic, and has had in-depth discussions with bankers about their reservations.
He says even though there’s a six-month repayment freeze on the loans, businesses aren’t really able to show they’ll be able to make payments when they do come due, especially under loan terms that only run to three years.
“[The program] has helped banks approve things that they wouldn’t in a normal scenario, but at the same time, businesses still have to show their capability to repay the loan,” Makkar tells SmartCompany.
“The issue that’s come in is there are a lot of businesses that are only trading at about 30% of what they were before … that’s when even though its secured by the government banks won’t lend it out because there’s no revenue coming in.
“The way we have to pitch it to the bank is understanding that in six months time this business won’t be back to normal and won’t be able to make repayments.”
Government moves to address concerns with phase two
The government has taken steps as recently as last week to address banker appetite, moving to ease up on responsible lending obligations for banks and clarify that these rules don’t apply to small businesses.
Essentially, they’ve echoed the view of Reserve Bank governor Phillip Lowe, that if there aren’t any bad debts on bank books, not enough credit is flowing.
“On a portfolio basis, we want banks to make some loans that actually go bad, because if a bank never makes a loan that goes bad, it means it’s not extending enough credit,” Lowe told a parliamentary committee hearing last month.
The government is also seeking to address criticisms about the unsecured loan program in a second phase, under which maximum loan sizes will increase four-fold to $1 million and terms will increase from a maximum of three years to five.
The interest rate on these loans will also be capped — a change made after the AFR identified some businesses were being charged rates of about 18% under the program.
But small business advocates are calling on Treasurer Josh Frydenberg to go further and actually change the way the loans themselves work by morphing them into something that resembles university HECs loans.
These revenue contingent loans would only require businesses to begin making repayments once their revenue recovered by a certain degree — a move supported by small business ombudsman Kate Carnell and COSBOA.
We’ll find out if there are any more changes on the way to the loan program in the upcoming 2020-21 budget, which will be handed down on October 6.