Your Guide to the Coronavirus Economic Stimulus Package Supporting the Flow of Credit
Statistics show that less than half of all small businesses survive after 4 years. Most small businesses have low cash buffers and fixed expenses like rent, utilities, and employee wages. So, any disruption to cash flow is a grave threat. And that’s without a pandemic.
Over the last 2 weeks, we brought you parts 1 and 2 on how the Government plans to support individuals and households, and small businesses. In this 3rd and final article in the series, we’ll take a look at what support is available to meet the immediate cash flow needs of businesses.
A lifeline for survival
As the fear of uncertainty continues to blanket over the economy, small and medium enterprises are conserving cash, re-assessing, and prioritising. Lack of funds can paralyse any business, so access to resources is readily available to ensure survival.
Together with the Reserve Bank of Australia (RBA) and the Australian Prudential Regulation Authority (APRA), the Australian Government has released a series of programs to support the flow of credit.
Coronavirus SME Guarantee Scheme
What is it?
Under the Scheme, the Government will provide a 50% guarantee over the value of loans to Small and Medium Enterprise (SME) lenders. It aims to enhance the lender’s willingness and ability to provide credit. The Scheme commenced in early April and will be available for new loans made by participating lenders until 30th September 2020.
What are the terms?
- Maximum loan size is $250,000 per borrower
- Loan duration is up to 3 years, with a repayment-free period of 6 months
- The loan is unsecured, so assets are not required as security
- The loan will be subject to the lender’s usual credit assessment processes.
Who is eligible to apply?
Businesses with a turnover of up to $50 million can apply. Lenders who wish to participate are invited to complete an Expression of Interest form.
Quick and efficient access to credit
What is it?
This measure will provide a temporary exemption for responsible lending obligations for lenders and will apply to new credit, credit limit increases, and credit variations and restructures.
Who is eligible?
All businesses that meet the small business definition.
RBA reducing the cost of credit
What is it?
This package is designed to reduce borrowing costs. The RBA has released a funding facility for the banking system so that banks will have access to at least $90 billion in funding at a fixed interest rate of 0.25%. By lowering the funding costs for banks, interest rates for borrowers will also be reduced.
Who is eligible?
Households and businesses.
Support for non-ADI and smaller ADI lenders in the securitisation market
What is it?
Authorised Deposit-Taking Institutions (ADI) are banks or financial institutions that can accept deposits from members of the public. An ADI license is required to offer deposit products including term deposits, savings accounts, cash management accounts, etc.
The Government is providing the Australian Office of Financial Management (AOFM) with $15 billion to invest in structured finance markets through purchasing assets that support small businesses (like unsecured and secured loans) and consumer lending (credit cards and personal loans).
This measure will assist smaller lenders to maintain access to funding to keep mortgages and other borrowing costs for businesses low.
Ensuring banks are well-placed to lend
What is it?
APRA announced temporary changes to expectations regarding bank capital ratios to support banks’ lending to customers, particularly if they wish to take advantage of the new facility being offered by the RBA.
Conclusion
This concludes our 3-part series. Here again, are the key measures released in the fight to save the Australian economy from collapse:
- Support for individuals and households. Financial assistance in the form of wage subsidy, income support payments for the unemployed and pensioners, and temporary early release of superannuation.
- Support for businesses. This includes measures for a temporary cash flow boost, a safety net for financially-distressed businesses, investment incentives, and wage subsidies for apprentices and trainees.
- Supporting the flow of credit. To better manage the impact of the Coronavirus and help support activity, these reforms are designed to encourage lending to businesses through low-cost funding and cutting red tape.
While many are comparing the current pandemic to the Global Financial Crisis, it’s a completely different problem that needs a completely different solution. Will the measures work? Let’s hope so.
Let’s check in on each other. Let’s stay home and save lives.
We’re in this together. If you need help working out what initiatives you can access please reach out to the JBS Financial team for help here.
Here are links to some useful resources:
Small Business Counts report (2019)