SMEs set to receive revenue-contingent loans in post-JobKeeper support package

The federal government is expected to announce revenue-contingent loans as part of the post-JobKeeper support package for small businesses in sectors still struggling after the COVID-19 pandemic.

The loans will be interest-free, and accessed through a partnership between the government and commercial banks. Repayments will only be required after a business’ revenue recovers, The Australian Financial Review reports.

The support package is expected to be announced in the coming days as part of the Morrison government’s strategy to help businesses that are currently relying on JobKeeper — but that are likely viable in the long-term — to survive once the $100 billion scheme ends on March 28.

The interest-free loans will reportedly be targeted at small to medium enterprises in industries still reeling from the downturn in trade resulting from ongoing international travel restrictions.

However, small business policy advisor at CPA Australia Gavan Ord says an interest-free loan scheme would have the most impact on SMEs if business owners are also provided with better access to financial advice.

“In the absence of detail, targeted support is important. But without access to advice, it will be less effective,” Ord tells SmartCompany.

Ord suggests providing loans without advice is akin to “treating the symptoms of a patient without addressing the underlying conditions”.

“Businesses need independent advice to make sure this solution is right for them,” he says.

There are also doubts over the accessibility of the new loans scheme. The government’s SME loan guarantee scheme, which was set up last year to offer $40 billion in new, short-term, unsecured loans, with a government guarantee of 50%, was not widely used.

Of the $40 billion allocated to the current scheme, only $2 billion was lent to small and medium businesses over 12 months.

The new interest-free loan scheme is expected to have a strict eligibility criteria, to prevent businesses that are unviable in the long run to qualify for a loan and to shield the scheme from abuse.

The government will design the loan scheme in such a way that prevents “phonexing” — that is when dishonest businesses access loans, only to put their businesses into administration and reopen another business in order to avoid repayment.

Ord says including a measure that ensures businesses seek independent financial advice prior to applying for a loan would also help stop dishonest applications from being approved.

“But, we don’t want to scheme designed in such a way that measures to prevent abuse lead to legitimate businesses missing out,” he says.

It is thought that in order to be eligible for the new interest-free loans scheme, SMEs will be expected to demonstrate their pre-COVID-19 profits.

However, the precise criteria will be confirmed after the government announces the scheme later this week.

For Ord, questions remain about how banks will apply their credit assessments before approving the loans, and how difficult the application process will be.

“We need to see the detail, and if the eligibly criteria is applied too rigidly, otherwise viable businesses are still going to experience hardship and might miss out,” he says.

In the past, the Victorian state government contracted the credit assessments of its bushfires concessional loans to the big banks, which then required businesses to prove they weren’t eligible for other finance before they applied.

“That meant that they had to make all of these applications for finance that they knew they wouldn’t get, just so they could apply for the government’s concessional finance,” Ord explains.

Bruce Chapman and Warwick McKibbin, economists from the Australian National University, have advised Treasury on how the loans could function if repayments are based on an increasing revenue in the long term.

CPA Australia has also submitted to the federal government ahead of the upcoming budget that measures to help businesses access professional advice and standardised disaster support are essential.

“If its not covered in this week’s announcement, then it should be covered in the upcoming federal budget,” Ord says.