The government’s SME loan scheme that debuted this week is ‘not worth the paper it’s written on’ and the Big Four banks are systematically failing Aussie small businesses, according to two leading commercial brokers.
In the week in which JobKeeper is replaced by a third iteration of the SME Guarantee Scheme (SMEG), Australian Broker spoke to two leading figures in the commercial broker space to canvas opinions on the two previous versions of the scheme, and to ask their opinions on the potential success of the new version.
The results were damning: the previous versions were called out for being overly complex, slow and near-impossible to access for those SMEs that actually needed it, while the new scheme was described by one as ‘not worth the paper it’s written on’ and by the second as “redundant”.
The previous schemes, SMEG1 and SMEG2, focussed on backing the Big Banks to lend to struggling businesses, but failed massively in helping those in need, as almost any business that qualified for the government scheme would fail to pass Big Four credit approval.
SMEs who most needed support were unable to get it
Rob Grul, National Broker Manager at GH Financial, said that he had only seen a "handful" of SMEs actually get financing under the scheme.
“There has been a fair bit of take-up from the non bank lenders,” he said. “Fintechs predominantly took this to market and it was accessed. Where we didn't see a lot of take up was from the major banks. We received a lot of enquiries on how to access these, but the majority of these clients were unable to access even though the stimulus was provided for struggling business because they didn't fit the bank's credit criteria.”
“Which in itself, we found moderately amusing given that the stimulus was there for businesses which were struggling through COVID, then they couldn’t access it due to the fact that they were struggling.”
Nick Harper, private funding specialist at Fuzion Capital and lending adviser at Keylend, spoke of the difficulties that he had in turning around deals for his clients.
“If you look back to SMEG1, I had clients who attempted to access some of that and were successful,” said Harper. “The problem was that the timeframe to turn it around was massive. I actually ran through it myself to give it a trial: I rang NAB, who I bank with, to see if I could access a SMEG1 loan for my own business out of curiosity, and it was very prohibitive.”
“There were plenty of hoops that you had to jump though - now I'm a broker, so if I can't access it for myself on reasonable terms, how can an individual with limited financial knowledge approach a bank and expect to be able to access that?”
Big Four banks fail struggling SMEs
“The second-tier lenders - the Liberty Financials of the world - were fast and switched on. Their rate was higher, but it was far easier to access the money than it was through a Big Four lender. The scheme was rolled out at such a speed that the banks and the lenders weren't really consulted. It was poorly designed. It was poorly operated.”
“When you look at how they rolled out SMEG2, it's been a lot easier to manage than SMEG1. I think the banks and the government really didn't work well together to deliver the solutions that it was designed for. The amount of stuff you had to provide to get it done and the amount of people that you had to talk to made it very difficult to find the right person in a SME banking section of a lender to access that. And as soon as they found one thing that didn't qualify you, they tried to switch you to their own product which was a higher rate, wasn't backed by the government and gave them the opportunity to make a lot more money.”
New SME scheme doomed to failure
The new version of the scheme, known as SMEG3, will greatly expand who is eligible for support and see the government back up to 80% of loans, but, according to Harper and Grul, will do little to solve the underlying issue.
“The problem that they've got is that they've said that under the new terms of SMEG3, you've got to have had JobKeeper in 2021 to access it,” said Harper. “But if you were accessing JobKeeper this year, is a bank going to want to lend to you when you've probably not had the revenue coming through for the 9 months previous to that? So yes, the government will back it, but the banks' lending policies are not going to match what this is setting out to achieve.”
Grul added: “A lot of the banks did offer very cheap rates on asset financing through all this, but they were only offering it to customers that, for the most part, hadn't accessed government stimulus. Cherry-picking, if you will, the businesses that weren't affected by COVID and then using the government guarantee to spread the weighted risk on their balance sheet.”
“I don't think giving stimulus to the banks and then letting them control how they dispersed it worked in any shape or form in my opinion.”
Fintechs and non banks could be answer to SME prayers
There are solutions, as Nick Harper was quick to point out. “The only real way they can make this work is to give a funding pool to the second tier lenders and the fintechs,” he said. “They're fast. The reason that SMEG 1 and 2 didn't hit the target was that the fintechs didn't have a pool of funds.
“They're faster and can deliver more effectively, but their cost of funds was so much higher, no one wanted to go to them at 5 or 6% when the fintechs are charging 12 to 15. If they had access to the cheaper funds back then, it would have been far better delivered, far more targeted and we probably wouldn't have SMEG3.”
“The only real way to make it work is to get smaller lenders involved, with a pool of funds, where they can take funds out of the bond market or the reserves. The government is putting up a lot of money: well, give them a pool of $40 billion if you want them to lend it, put it up and let the smaller lenders draw from it to fund the loans. That's the best way to make it happen.”
“At the moment, you've got the Big Four who can do a $5m loan, but, for example, Liberty - they can't do that much, it's not a programme for them. This is a programme for the Big Four banks but their lending policy doesn't match what is needed, because they're going to look at what you've earned in the last nine months and say 'mate, you can't service the debt'.”
“The SME schemes have been difficult for people to get around, even people that work in the industry haven't necessarily understood a lot of what they're about. When this new one came out, I just looked at it and shook my head. If you've been on JobKeeper for a year, and the bank looks at your financials and you can't service the debt, they're not going to lend you the money to stay on your feet. So really, the scheme isn't worth the paper it's written on. It's not going to help anyone.”
Alternative lenders can help SMEs
Rob Grul said that any attempt to get Big Four banks to lend to SMEs doing it tough would fail, but backed Harper’s idea of directing funds at non banks and fintechs.
“You can't make the big banks lend money, and they don't have a shortage of funds, so offering to back the loans is not, in my opinion, going to incentivise the banks to lend money, because there is no shortage of funds in this market,” he said. “What they're trying to do is encourage the banks to take on more risks by offering to guarantee it, but the banks will still do their own credit assessment and most of the lenders in the Tier 1 space will still look at businesses that had a downturn in revenue through COVID and accessed JobKeeper as negative in their credit submissions.”
“Alternative lenders have lent throughout this whole process, and they're more incentivised to lend because their bank sheets are significantly smaller. A lot are new to market as well, so this is good business practice to grow their businesses. That's one of the benefits about alternative lenders. We're really in our infancy here in Australia but there's not enough competition. Once you see competition in any market you see people working harder for their market share: at the moment, the big banks don't need to do that, but the alternative lenders do.”
“They're much more motivated to get their money out, but at what costs to SMEs, because their prices are more expensive. So you've got a government stimulus scheme that is offered to banks and non banks, but only non banks are rolling it out, so SMEs are being penalised by higher interest rates. That makes it redundant.”