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‘More debt is not the solution’: why the government’s COVID-19 loan program will probably never work

Treasurer Josh Frydenberg.

After three months, only four percent of the $ 40 billion available under the federal government’s COVID-19 loan program has fallen into the hands of SMEs.

Recognizing this, the government decided on three improvements:

  1. The duration of guaranteed loans can be extended from three to five years;
  2. SMEs can now borrow up to $ 1 million, up from $ 250,000 previously; and
  3. The objective was broadened beyond working capital to include “investing”.

Not surprisingly, the big banks have offered their support for these changes. Commonwealth Bank chief Matt Comyn said the expanded program would give businesses more financial support.

“The changes will make it available to more businesses, for longer, to help them rebuild – and support Australia’s recovery,” said NAB boss Ross McEwan.

Why the loan program didn’t work

There are two very simple reasons why the system has not worked so far and these same reasons are why it is unlikely to work better in the future.

First, SMEs are reluctant to borrow when they don’t know when this pandemic will end, and no one knows when it will be, especially if you live in Victoria.

“The expanded program will allow businesses to access more credit for a longer period,” said Treasurer Josh Frydenberg.

If they are reluctant to borrow up to $ 250,000 over three years, why would they be more inclined to borrow up to $ 1 million over five years?

And it doesn’t matter if it’s working capital or a long-term investment. Until companies see a future, they will remain reluctant to borrow.

Second, banks don’t want to provide unsecured debt to businesses that might not survive. If they don’t want to lend up to $ 250,000 unsecured for three years, why would they want to lend more money unsecured for a longer period?

According to Australian Bankers Association chief Anna Bligh, the changes “will open up the program to more small and medium-sized businesses in need of help.”

The reality is that for most SMEs, taking on more debt right now is not the solution.

And expecting banks to provide more unsecured debt to businesses that might not survive is in no one’s best interests. Providing a guarantee for half of the loans taken out did not encourage banks to lend more than they would have done otherwise.

What about fintechs?

The Coronavirus SME Loan Program is better suited to fintech lenders because they have the appetite and the technology to provide unsecured loans to the lower end of the SME market. Yet the total value of loans made by these lenders is estimated at less than $ 100 million, compared to a total of $ 1.6 billion for the banks.

This is not so much due to the lack of appetite of lenders, or even to the demand of SMEs, but to the difficulties faced by smaller and newer lenders in ensuring that their own financing terms align with the market. program.

In addition, it naturally took some time for regulators to fully understand and familiarize themselves with the modus operandi of these lenders, which operate very differently from traditional lenders.

Interestingly, skeptics predicted that an economic downturn would prove to be the loss of fintechs that lend unsecured to lower quality SME borrowers. The opposite view is that this would create the opportunity for fintechs to reinforce why they are becoming an increasingly important alternative source of finance for SMEs.

Time will tell, although it can be said that the plan changes are unlikely to make much of a difference for fintechs, as they generally prefer to lend smaller amounts for shorter terms than banks.

So where are we going?

As everyone recognizes, there are no easy answers. Many SMEs will not survive and as hard as it sounds, we need our banks to continue to be frank about this.

A concerted effort must be made to help existing SMEs survive and prosper and to encourage a post-corona boom in the creation of new businesses.

Debt is only part of the equation. Small businesses often need equity more than debt. Tapping into superannuation funds is an important source of equity and we need to overburden Australia’s business growth fund by $ 2 billion.

We also need to make small business owners better understand the very different roles that equity and debt play in building and growing a business.

Tinkering around the edges of the SME lending program to allow lenders to offer more longer-term debt is not where we need to focus. Business and government can and should do much more to support the long-term growth of SMEs.

A recent report commissioned by the NAB identified eight key actions that can be taken to support and stimulate SMEs:

  1. Facilitate the hiring of new employees;
  2. Cutting regulations;
  3. Ensure small businesses get paid faster to increase cash flow and access to working capital;
  4. Harness the power of digital tools;
  5. Opening of supply opportunities;
  6. Increased access to different types of capital;
  7. Raising the management capacity of small businesses; and
  8. Improve the conditions of state affairs.

If we manage to make real progress in these areas, Australia’s struggling SME sector could become the main driver of the recovery and herald a new era of national prosperity.

This article first appeared on LinkedIn.

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