Two recent Government announcements indicate that Australian businesses are to be progressively weaned off Government life support and are being encouraged to become more self-reliant, with a growing expectation that they need to become more proactive about their future.
- JobKeeper/JobSeeker Payment Scheme - On 21 July 2020, the Morrison government announced that it will continue the JobKeeper and JobSeeker programs for another 6 months beyond the original September 2020 expiry but with important changes. Effective the end of September this year the Government will cut the JobKeeper wage subsidy from $1500 to $1200 a fortnight for full-time workers and part-time workers to $750 (and will be revised in December). Whilst businesses and employees severely impacted by the pandemic will be relieved that the scheme is being extended to March 2021, others are concerned about what this means for business continuity and their staff 1.
- Coronavirus SME Guarantee Scheme - On 20 July 2020, Federal Treasurer Josh Frydenberg's office released a Joint Media Release with Senator the Hon Michaelia Cash Minister for Employment, Skills, Small and Family Business on the extension and expansion of the Coronavirus SME Guarantee Scheme to support eligible small and medium sized business with the flow of credit with loans (previously $250,000.00 to $1million, and extending repayment terms from previously three to five years). The scheme which was originally scheduled to end in September will now continue to June 2021.
The recent announcements provide small and medium size business with assistance to adapt.
This article specifically addresses the Coronavirus SME Loan Guarantee Scheme - The Good, the Bad, the Ugly, and the opportunity that has emerged from the updated Scheme.
Who could the Coronavirus SME Guarantee Scheme help?
The Scheme could help small and medium businesses with less than $50 million turnover which includes self-employed individuals and not-for-profits.
The Government will guarantee 50 per cent of eligible loans issued by participating lenders under the Coronavirus SME Guarantee Scheme. The guarantee will apply to eligible unsecured loans and the guarantee will apply to both principal and interest.
To meet the turnover requirement, the business's annual turnover must:
- Have been less than $50 million in the previous financial year; and/or
- Be likely to be less than $50 million in the current financial year.
Under the 8 April 2020, Coronavirus SME Guarantee Scheme loans issued under the scheme must be:
- Unsecured (cannot be for credit cards);
- Used for business purposes only;
- May be used to refinance new loans or increases to existing loans provided outside of the Scheme only if the new loan or increase was entered into or after 23 March 2020 and before 23 June 2020; and
- Loans issued under the Scheme cannot be used for any other refinancing purposes, either with the existing lender or any other lender.
What has been extended? What has been expanded?
- Secured lending will also be permitted, excluding commercial or residential property, and the maximum loan size will be lifted to $1 million from the initial $250,000.
- The initial phase of the scheme remains available for new loans issued by eligible lenders until 30 September 2020, with the second phase of the scheme to kick off on 1 October 2020 and run until 30 June 2021.
- Other changes include an increase of the maximum loan term to five years (from three years) and the introduction of lender discretion to offer repayment holiday periods.
The Good, the Bad, the Ugly, and the Opportunity
The Good
The significant extension and expansion of the Scheme supports SMEs through overdraft facilities, working capital and other cash flow.
- Max loan terms from 3 years to 5 years
- Loan amount from $250,000 to $1 million
The Bad
Business owners need to understand that the Coronavirus SME Guarantee Scheme is a loan and not a grant. This means that if it is not repaid, the borrower may be liable for the principal, interest and costs.
In the Joint Media Release, the Treasurer has quoted that the Scheme has already seen more than 15,600 businesses accept loans worth $1.5 billion. What happens if those loans are not repaid?
The Ugly
The Scheme may provide brief respite to cash flow but depending on the terms of the loan and overall health of the business - it's devastating impact may be felt later in the form of enforcement against not only the assets of the company, but those who have provided director or personal guarantees with exposures.
Business owners need to use this opportunity to seriously examine their business' past, present and future with a strong regard to their director's duties under the Corporations Act 2001 (Cth).
The Opportunity
Why not take advantage of this funding opportunity to improve your business, resolve existing disputes and make an informed decision?
It is important that borrowers understand the terms and purpose of the Loan. Borrowers should understand the consequences of a personal/director guarantee and the consequences of any defaults.
Before Businesses apply for the Coronavirus SME Guarantee Scheme, business owners and directors should seize this opportunity to seek independent advice in relation to:
- The overall health of the business;
- Any restructuring or turnaround options available;
- Involuntary insolvency exposures before undertaking more debt (such as resolving commercial lease disputes, debts or business disputes);
- Impact of director/personal guarantees on enforcement; and
- Any exposures to personal liability for directors, opportunities to take advantage of safe harbour provisions or whether directors are in in breach of their duties (such as the duty to act in good faith and in the company's best interests or the duty not to trade whilst insolvent)?
What can I do?
To survive the Coronavirus requires understanding the good, the bad, the ugly and the opportunities in your business.
The revised Coronavirus SME Loan Guarantee Scheme is an opportunity to obtain respite, advice and can be that lifeline, in the right business if it is used appropriately - when it matters.
Footnote
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.
