Finance Market Update – 24 April 20
If small business is the engine of the economy the recent government funding is the fuel. In this update we talk about the state of play for small businesses, the economy and what a recovery might look like.
Keeping the engine running
Politicians often like to refer to small business as the engine of the economy.
One of the key new government schemes is called the Coronavirus SME Guarantee Scheme and it is designed to put fuel (credit) into the engine (SMEs).
It is right that politicians call small business the engine because there are roughly 2.3 million of them powering the economy in Australia.
But the engine is stalling.
The virus crisis is taking toll and many small businesses are shutting up temporarily or for good. The government has set up schemes to help them survive the economic fallout, but time will tell if it is enough.
The SME Guarantee Scheme is designed to give the below list of lenders confidence to put money out the door and into small businesses to keeping running and growing.
In last week’s update we talked about how access to credit drives property prices and could say they access to credit for business, meaning cashflow, is the lifeblood they need to survive. This is what makes this scheme so important, it will literally save the lives of many businesses.
Under the scheme the government is guaranteeing 50% of the loan amounts from eligible lenders and hoping to pump $40 Billion into the accounts of small businesses.
But there is a catch.
It is the lenders who decide to do the loan or not and they each have their own risk appetites and credit criteria.
This means the loan size could vary wildly lender to lender.
For example, while the maximum loan amount available is $250,000 it is likely that the average loan size will be half or less than this amount across the board but for specific lenders their own average could be in the upper quintile.
The big banks have quoted rates of 4.5% and probably take weeks to approve and settle the loan while non-bank lenders will likely charge much more but take only a few business days to settle the funds.
Further the loans can have the first 6 months of repayments paused. But interest is capitalised and similar to we talked about before with home loan repayment pauses this means you just pay the interest later. The repayments on a full $250k loan would be around $8k per month which is quite a lot for a business just starting back up after being in hibernation.
List of lenders approved in the scheme are noted below and can be found on the Treasury website here.
Skyward Financial works with most of these lenders so if you have any questions about your options Let’s Talk.
Australian Mutual Bank Limited
Bank of Queensland
Bank of us
Bendigo and Adelaide Bank Ltd
Commonwealth Bank of Australia
Goulburn Murray Credit Union
Heritage Bank Limited
Judo Bank Pty Ltd
Laboratories Credit Union
MyState Bank Limited
National Australia Bank Limited
On Deck Capital
Queensland Country Bank Limited
Regional Australia Bank Ltd
Summerland Credit Union
The Capricornian Ltd
On the road to recovery
Bondi beach will be open from next week.
That is a telling early indicator that things will start to re-open from the virus crisis pretty soon - but with conditions.
In the case of the famous beach, the conditions are that it is only open to swimmers and surfers or for exercise and people will still not be allowed to lounge around and sun bath on the sand.
This might be a similar model for small businesses to open back up.
Bit by bit.
Take a café or restaurant for example. At the moment their doors must be shut and tables unused, but they can offer takeaway and home delivery. It has actually been amazing to see so many businesses pivot their distribution model to offer very tasty and compelling takeaway and eat at home options instead of dining at the venue.
Under a new operating model conditions might be that they could allow a certain number of people into the premise or open for a certain number of hours per day for dine in. There might be a space per person condition like the current 4sqm rule.
Regardless I am sure many food businesses would be happy to have people sit back down and enjoy their food. Not to mention retail businesses and other trades ready and keen to get back to work.
But the conditions might remain in place for longer than we think, be prohibitive for certain businesses and consumer behaviour and spending will not snap back right away.
We could see quite a few collapses of smaller venues and hospitality businesses that struggle to get people in the door but still face large rents even after the waivers from landlords and the new Code of Conduct and a continued drop in revenue from consumer spending.
And remember one persons spending is another person’s income so the less people spend the less others earn.
This is will be particularly true in the next few months.
It is likely that average spending of households will moderately drop over a few months after the ‘Great Lockdown’ (except for the spikes in panic buying and alcohol) especially for discretionary spending.
Not to mention the HUGE rise in unemployment just means some people don’t have money to spend.
That drop in spending and therefore income will hurt a lot of businesses.
Ultimately, the speed of recovery will be determined by the speed of a vaccine being widely available combined with tracking and monitoring of infections.
Until then - bit by bit.