In this update we talk about the issues SMEs are having in getting the government guaranteed unsecured business loans and why this recession we are already in is going to be the worst kind.
Guaranteed headache
The government might be guaranteeing half of an unsecured business loan for a small business but getting the money from the bank is a challenge.
Under the SME Guarantee Scheme the government announced to support small businesses during the virus crisis small businesses should be able to get an unsecured loan of up to $250,000 over 3 years with no repayments for the first 6 months.
And the government guarantees half the loan to reduce the risk and incentivise lenders to get money into the economy and small businesses.
But getting the loan can cause a headache.
Businesses that are applying for these loans with the big banks are often waiting weeks to get a response and response is often disappointing because it is either a declined application or a lower loan amount than wanted or needed.
The loans taking so long could mean survival or not for a small business and banks are prioritising existing customers over new to bank customers.
This is not entirely new but at the moment with how slow they are in making credit decisions and getting money out the door it seems like they much prefer dealing with people they already know.
This can be to the detriment of an under banked SME who has not been able to (often for no fault of their own) build a relationship with their bank.
This is where a relationship focused broker like Skyward Financial can make a difference.
We understand our clients and the market and know where to get the finance they need, whether from their existing lenders or elsewhere. If you or someone you know need help Let’s Talk.
But banks are not the only option, and this is where fintechs are stepping in.
While they are more costly they can approve and deliver funds in a matter of days and sometimes time can mean all the difference to an otherwise solid business with virus crisis related cash flow issues.
Paying a loan with a higher interest rate could often cost less than going out of business.
I predict that over the next few years second tier banks and non-bank lenders / fintechs will outpace growth in lending to SMEs compared to the big banks.
The worst kind of recession
Australia is already in a recession.
Indeed, it is the first in three decades and surely the be the worst of the four we have had in the last century.
The technical calculation of a recession is that over two consecutive quarters there is negative economic growth. But in a real-world calculation and experience, it means disastrous unemployment and prolonged societal issues for years.
What separates this recession from the others in living memory is that it is a ‘real world’ recession.
That is to say it is not a financial bubble like the one that caused the Global Financial Crisis in 2008. Rather it started from a virus infecting and killing people in real life, and that makes it a vastly different kind of recession, the worst kind.
On top of that the signifying issue of recessions is unemployment and this time because the government effectively shut down the economy by ordering businesses to close and locking people in their homes.
While it was certainly the best course of action to stop the spread, flatten the curve and save lives, it meant that hundreds of thousands of small businesses shut their doors, almost at the same time.
And that has exacerbated unemployment to a greater extent than ever experienced.
This makes the virus crisis much different compared to other recessions – the government is the one who basically initiated it.
In the four recessions Australia has had in the past century, almost thirty years since the last which is a standout economic achievement in the world, this virus crisis recession will probably be the worst.
You might have heard the expression ‘unemployment goes up in the elevator and down by the stairs’ saying is rises way fast than is drops.
In fact, after the recession in the early 90’s it took 14 years for employment to get back to pre-recession levels. And that was a minor recession by comparison.
Already we have around one and a half million people filing for unemployment and that number will keep rising, but it is likely even higher than the official number because of JobKeeper which is kind of masking other yet to be unemployed people.
This means it could be many years before things are back to normal.
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