How do we get a Bank Loan to help us through Coronavirus?
We are getting a lot of queries from businesses about whether they are eligible for bank loans to support their cash flow through the Coronavirus shut-downs.
When a business is ‘in hibernation’, many expenses still need to be paid (such as insurances and utilities). If the business is putting staff onto Job Keeper payments, the Job Keeper payment is a reimbursement of the salary cost. This means that the business needs to pay the salary out of their own cash and they are then reimbursed the money via the ATO. Some businesses do not have the cash to pay their employees and they need working capital to ‘bridge the gap’.
The Coronavirus SME Guarantee Scheme was established by the government to provide small and medium sized business with access to working capital to help them get through the impact of the Coronavirus.
By way of background, the Government allocated up to $40B to guarantee eligible lenders for working capital loans to support small to medium sized businesses and community groups with an ABN. They must have an annual turnover less than $50 million. Not-for-profit organisations with turnover less than $50 million are also eligible. The loans have the following features:
Maximum total size of loans of $250,000 per borrower.
Loan term will be up to three years, with no repayments required for the initial six-months. This means that interest is capitalised (is added) to the loan for the first 6-months. Assuming a rate of 5%, this means that approx. $11K is added to the loan assuming that the initial loan is $250,000.
The loans are unsecured, meaning that borrowers will not have to provide an asset as security for the loan. The government is guaranteeing half of the loan, which means the banks are covered for half of the loan balance.
Most of the banks have settled on an interest rate between 4.5 – 5%.
There are no establishment fees.
It is important to note that the support scheme is a loan, not a grant. This means that they have to be repaid. The banks are still bound by their responsible lending requirements and the Royal Commission findings are all fresh in their mind.
The government has allowed lenders to make their own decision on whether to approve the loans however, the Government has indicated that they expect that lenders will ‘look through the cycle’, meaning that they are not making the decision based purely on the current circumstances. In practice, most lenders have agreed that they will look at the historical trading results of the business, that is to say that if the business would have qualified for the loan prior to the pandemic, they should qualify now.
Typically, the lenders will require the following supporting minimum documentation to assess an application:
The most recent business financial statements and tax returns (usually 2019 figures will be required.
Current Business Activity Statement (BAS) on a 12-month rolling basis ending with the most recent statement
ATO Integrated Account Statement covering the most recent 12 months BAS.
It would also be beneficial to provide the following additional information:
A basic forecast for the coming 3 – 6 months
Details of the measures that the business has undertaken to reduce expenses whilst in hibernation
Details of the eligible employees who are going to be put onto the Job Keeper payment
Some evidence of Job Keeper eligibility (does the business meet the Job Keeper guidelines for reduced turnover?).
There may be subtle differences between the individual banks, but the above should satisfy most of their needs.
Last week, some of the ‘Fintech” (Financial Technology) companies were also approved to be participants in the scheme. They are developing their approach to the administration of the scheme at the moment, so we await details of how they will assess the loans and their interest rates and fees.
So, how does a business know whether they will qualify for support?
Firstly, it is important to understand the repayment amount. There are many online loan repayment calculators on the internet. These will provide an indication of the monthly repayments for different loan amounts. As an example:
Initial loan amount $ 150,000
Interest capitalised $ 3,750 *
Amount repayable $ 153,750
Term 2 ½ years **
Rate Assume 5%
Repayments $ 5,462.64 per month
* Interest is added to the loan because of the 6-month repayment break
** The loan term is 2 ½ years because of the initial 6-month repayment break, then the loan needs to be repaid within 3-years of the start-date.
The business will need to demonstrate that it can repay $5,462.64 per month, based on its normal turnover and profitability.
If the business is repaying the loan using the Job Keeper payments, then the cash flow projection should show the salaries being paid and then reimbursed from the ATO.
Some common mistakes are summarised below:
Not having the required historical information.
Not properly understanding the true funds required.
Not taking other measures to reduce expenses.
Not understanding historical borrowing capacity.
The government has provided significant incentives to support small businesses through the banks and other lenders.
Whilst the loans are government guaranteed, the business still needs to demonstrate that they can afford to meet the repayments.
Lenders also want to see that all other available measures have been put into place to reduce expenses. It’s important to be able to evidence these measures.
Make sure that there is some ‘science’ behind the loan amount. Specifically that the amount relates properly to the cash gap. Also that the amount sought can be repaid from proceeds of the Job Keeper payments or the loan could be repaid from normal profits (pre-Covid).
We provide guidance to businesses on loan eligibility all the time. We can advise whether a business will qualify for a specific loan amount, or repayment amount. We can also assist with the provision of the correct documentation to secure an approval.