In our last article "Take advantage of this low interest rate opportunity with a finance facility review", we spoke about the opportunities that now exist for businesses to review their finance facilities due to the low interest rate environment and highly competitive lending market. The response to that article was overwhelming and as such, we have continued the theme this week on finance facilities backed by the Government SME Recovery Loan Scheme initiative.
The purpose of this week's article is a technical piece outlining the scheme's terms, its basis for existence and a working example that highlights the savings. The process may require the engagement of a safe harbour adviser if the position of the company is in financial distress.
What is the Government SME Recovery Loan Scheme?
The new scheme builds on earlier loan schemes and is designed to provide small and medium-sized businesses access to government guaranteed loans to help their businesses recover from the impact of COVID-19. Entrance to this new scheme was eased to provide additional support to SMEs who continue to deal with adverse economic effects of COVID-19 from 1st October 2021.
The new scheme is available to businesses with a registered ABN and an annual turnover of less than $250 million.
To access the Loan scheme, you can apply through your finance adviser, broker or directly via the lender and is being offered by the major banks and other financial institutions such as Judo Bank. The purpose of the scheme is to enable a lender's abilities to provide cheaper credit to viable SMEs so they can recover, restore and invest in the future. Loans are available from 1 April 2021 to 31 December 2021.
What are the key features of the Loan?
The key features of the SME Recovery Loan Scheme are:
- The Government guarantee will be 80% of the loan amount.
- Borrowers can access up to $5 million in total, in addition to the Phase 1 and Phase 2 loan limits.
- Loans can be used for a broad range of business purposes, including investment support or refinancing any pre-existing debt of an eligible borrower, including those from the SME Guarantee Scheme.
- Lenders are allowed to offer borrowers a repayment holiday of up to 24 months.
- Loans terms of up to 10 years, with an optional repayment holiday period
- Loans can be either unsecured or secured (excluding residential property).
- Interest rates on loans will be determined by lenders, but will be capped at around 7.5 per cent, with some flexibility for interest rates on variable rate loans to increase if market interest rates rise over time.
What are acceptable purposes for the Loan?
The SME Recovery Loan may be used for the following purposes:
- Refinance existing business loans
- Purchase Business Assets
- Working Capital
- To purchase a commercial property
- To acquire another business
The SME Recovery Scheme Loan may not be used for the following purposes;
- The SME Recovery Scheme Loan may not be used for the following purposes;
- To purchase residential property
- To purchase financial products
- To lend to an associated entity
- To lease, rent or hire purchase existing assets that are more than halfway through their effective life
Working Example - How to effectively use SME Recovery Loans to improve both the cost of capital and business cashflow
Set out below are two tables that outline how a SME Recovery Loan facility may be worthwhile for an SME business.
The first table details the existing facilities that the example borrower might have and the second table outlines the new terms of the loan under the scheme.
Existing facilities
| Loan Purpose | Security | Loan Amount | Term | Interest Rate | Repayment Type | Repayment / Month |
| Working Capital | Commercial Property | $1,500,000 | 5 years | 3.5% | Principal & Interest | $27,288 |
| Commercial Equipment | Commercial Equipment | $500,000 | 4 years (30% residual) | 4% | Principal & Interest | $8,403 |
| Working Capital | Unsecured | $100,000 | 5 years | 5.5% | Interest Only | $458 |
| Total | $36,149 |
Restructured facilities using SME Recovery Loan Scheme
| Loan Purpose | Security | Loan Amount | Term | Interest Rate | Repayment Type | Repayment / Month |
| Working Capital | Commercial Property | $1,500,000 | 10 years | 2.58% | Principal & Interest | $14,195 |
| Commercial Equipment | Commercial Equipment | $500,000 | 7 years | 3.00% | Principal & Interest | $6,607 |
| Working Capital (unchanged) | Unsecured | $100,000 | 5 years | 5.50% | Interest Only | $458 |
| Total | $21,260 | |||||
| Annual Cashflow Benefit | $178,662 |
Under the working example, you can see that repayments can be reduced by up to $15k per month for a total value of loan facilities of $2.1m.
Anthony Azar of Fenero says:
"We have seen strong interest in recent weeks wanting to seek out financing through this scheme. When it comes to the numbers every client should be exploring this option closely to see whether entering into a refinance solution under this scheme creates stronger working capital resulting in a thriving and growing business."
Anthony goes on to say:
"Having worked closely with Simon Cathro of Cathro & Partners in the past, we can see real value to combine the refinancing process and safe harbour process together when a client approaches us and is in some form of financial difficulty. Whilst the goal is to avoid an external administration, the readily available facilities like the SME Recovery Loan Scheme makes the success of a safe harbour process stronger."
Safe Harbour - How can it integrate into a review of finance facilities?
The Loan Scheme introduced by the Government aims to assists businesses that are likely to be in some form of financial distress. The implications of a business in financial distress to an officer or individual owning that business is that they are still obligated to ensure they are not trading whilst insolvent. The purpose of the recently introduced Safe harbour legislation aims to provide directors and boards with an opportunity to restructure and revive a business without the need of entering into an external administration.
It would seem to me that the opportunity to access this Loan Scheme for a financially distressed business should be undertaken together with appointing a safe harbour adviser in order to ensure that the funds are being utilised in its best way and that this is the best option for the business. It is important that businesses do not borrow funds without a plan in place to ensure the repayment of the loan can be achieved and the business can thrive as a result.
Considerations such as affordability, medium term survival, cashflow forecasts and pivoting the business to meet the new demands of a businesses' customer expectations - these issues need to be done in a proper way and the appointment of a safe harbour or restructuring adviser to assist achieves such an outcome.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
