‘Unrealistic requirements’: Carnell urges loan overhaul as 25% of SMEs knocked back by banks

Small business ombudsman Kate Carnell has urged the federal government to overhaul its SME loans guarantee scheme to introduce revenue-contingent repayments, arguing many businesses are struggling to access finance under existing measures.

Carnell tells SmartCompany too many small businesses are being knocked back when trying to access unsecured loans, partially guaranteed by the federal government, under onerous requirements imposed by the major banks.

“We’re seeing banks put in place quite unrealistic serviceability requirements,” Carnell says.

“We’ve seen requirements for all sorts of documentation for these loans, and concerningly — taking into account these loans are supposed to be unsecured — requirements for director guarantees, which at the end of the day really means your house.”

Carnell is concerned by new evidence many small businesses are struggling to access finance during the COVID-19 pandemic, with the August Sensis Business Index (SBI) finding 26% of SMEs have been knocked back over the last three months.

Published today, the latest SBI surveyed 1,015 business owners and managers, taken over the first week of August, just as Victoria imposed stage four restrictions on Melbourne businesses.

Worryingly, more than a third (37%) of regional businesses said they’d knocked back when applying for finance since May, while 25% of city-based companies reported rejections.

While the federal government devised a scheme in March — subsequently extended until June next year — to accept 50% of the risk on unsecured loans to SMEs from approved lenders during the pandemic, take-up has lacked.

Treasurer Josh Frydenberg said in July that about 15,600 SMEs had been approved for loans under the program, totalling about $1.5 billion — well short of the $40 billion loan capacity flagged for the program in April.

“Not much money is flowing out the door”

This appears to be due to a combination of businesses being reluctant to take on more debt, giving up in the face of bank requirements, and ultimately, being rejected by lenders.

Nationally, just 13% of August SBI respondents said they had sought finance assistance, a rate that was slightly higher in Melbourne (22%), Sydney (21%) and Canberra (17%).

The lack of interest isn’t for lack of financial stress, particularly in Melbourne, where tough stage four lockdown measures have wreaked havoc on business operations.

More than half (54%) of Melbourne businesses surveyed expect their profitability to decrease over the next three months, compared to 27% in Sydney.

Carnell says businesses the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) has spoken with are being asked to jump through all sorts of hoops to secure loans.

“The banks are very risk-averse with unsecured loans. I’ve seen small businesses who have dealt with their bank for a long period of time being asked to fill in full-scale personal serviceability requirements for their partners who don’t work in the business,” Carnell says.

“There’s no doubt this is in conflict [with the purpose of the program], and there’s also no doubt that not much money is flowing out the door.”

“The SME loans in their current form are just badly put together,” Carnell says.

Under changes to the program announced by Frydenberg in July, loan terms were increased from three to five years, a reform Carnell welcomes, saying many businesses are concerned about how quickly the economy will bounce back from the pandemic.

But the ombudsman has advised the federal government to further overhaul the program to ensure it’s fit-for-purpose for SMEs, including by introducing revenue-contingent repayments that would only require businesses to start paying back loans after their businesses had recovered.

“Businesses can’t control this pandemic in any way,” Carnell says.

“There’s a lack of confidence from small businesses and the major banks have been really difficult.”

While the major banks have taken steps, such as pausing repayments on small business loans, they have been criticised for failing to make enough credit available to help SMEs ride out the pandemic.

Prime Minister Scott Morrison reportedly expressed his frustration with executives at the major banks in April for failing to get loans out quickly enough for businesses to access JobKeeper reimbursements.

The day after Frydenberg announced dedicated hotlines for businesses to inquire about loans, but businesses didn’t exactly flood the lines with inquiries, later evidence revealed.

It is believed an inability to secure additional funds in April was one factor behind some 150,000 businesses failing to complete their JobKeeper applications, despite enrolling.

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