The Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, believes there are better alternatives to the federals government’s current SME loan guarantee scheme for small businesses looking to secure funding.
The Ombudsman said that the type of revenue contingent loan, recommended in her COVID-19 Recovery Plan, would be a better solution for many small businesses. The proposed structure of these loans would be a government-funded cash injection that is capped at a percentage of the enterprise’s annual revenue, with the requirement that repayments commence once the business’s once turnover reaches a designated level – the amount of the repayments would be calculated as a percentage of their turnover.
“Access to finance is critical to small business survival, particularly with a number of support measures scheduled to end or begin phasing out in the coming weeks,” Carnell said.
“Right now, small businesses are scared to take on any additional debt because they don’t know what’s around the corner and how any possible further lockdowns might impact their capacity to make loan repayments.”
Carnell said that a revenue contingent loan would operate in a similar way to HECS, with small businesses only required to start repaying once turnover recovered to an agreed level. If revenue was to drop below that level, payments would cease.
“Even in the best of times, many small businesses struggle to secure finance, with a recent Sensis report revealing that of the dwindling number of small businesses that applied for a loan in the past three months, about one in four had been knocked back.
“That research also showed about three-quarters of SMEs surveyed reported a drop in revenue, with more than 40 per cent expecting sales to decline significantly,” Carnell said.
The Ombudsman pointed out that even though with Government is taking on half of the risk under its loan guarantee scheme, loans continue to be subject to bank credit assessment processes, meaning small businesses with falling revenue face a steep uphill battle to secure finance.
“Of course, the proposed revenue contingent loan would require businesses to satisfy a viability test to be conducted by an accredited financial adviser,” Carnell said. “A revenue contingent loan would give small businesses the confidence they need to seek funding to get them through this crisis, so they can grow and employ.”
