Changes to the government’s SME lending scheme open the door to fintechs… but not all the way

As of today, changes to the government’s COVID-19 SME lending guarantee are coming into effect.

And, while the second phase is intended to encourage more take-up from small business owners, it could also open the door for more fintech and alternative lenders to get involved.

First announced back in March, the scheme offered up $40 billion in new, short-term, unsecured loans, with a government guarantee of 50%.

For lenders providing credit to existing SME customers, the government also issued a temporary exemption from responsible lending obligations, meaning small business owners could access cash more quickly and efficiently.

But, the scheme didn’t exactly take off.

In reality, six months later, less than $2 billion has been lent out under the scheme. And, Commonwealth Bank and NAB have been responsible for more than 80% of that.

Of the 44 lenders approved under phase one, more than three quarters are banks.

As reported in SmartCompany earlier this week, the loans scheme wasn’t working for many SMEs, with business owners suggesting the banks were quizzing them on the value of their assets or offering interest rates that were just too high.

At the same time, some banks noted lower than expected appetite from small businesses, simply because the program didn’t suit SMEs very well.

What’s new?

Under the new version of the scheme, the maximum loan size has been increased from $250,000 to $1 million per borrower, and terms have been extended from three years to five.

The initial six-month repayment holiday is also now at the discretion of the lender.

And, loans can now be secured or unsecured — although this specifically excludes commercial or residential property.

The scheme has also been extended to cover loans written until the end of June 2021.

Treasury is expected to introduce a 10% interest-rate cap on loans — a move the Australian Finance Industry Association’s chief executive suggested could reduce eligibility for some small businesses.

For those in the hospitality or retail industries, for example, short-term, high-interest loans for things such as new fit-outs or equipment may now be out of scope, she told the Australian Financial Review.

Enter new players

However, speaking to SmartCompany, Adam Lane, managing director of fintech lender Tradeplus24 and former general manager for business banking at NAB, says these changes open up the scheme to more lenders, and potentially more businesses.

Under the first scheme, it wasn’t necessarily even worth Tradeplus24 applying to be a part of the scheme, Lane suggests.

The new rules open it up to a swathe of fintechs, but also to other alternative lenders and non-bank institutions.

“The biggest change is the ability to have collateral, so security against the loan,” he says.

“You tend to find lenders, particularly in the fintech space, are either secured or unsecured lenders.”

He points, for example, to asset finance lenders, which lend businesses money for trucks, machinery or other equipment. Those loans are secured by nature.

“If you’ve got an asset of value that’s pretty easy to predict, it lowers the cost of finance exponentially,” Lane explains.

“Irrespective of value, if an SME wanted to buy a new piece of machinery … and they were willing to offer that as a security, it wouldn’t have fallen into the scheme previously,” he adds.

The other most significant change for Lane is the increase in the amount SMEs can borrow.

Increasing the limit to $1 million “means that medium-sized enterprises, we believe, will be able to avail of loans under the scheme”, he says.

A costly elephant in the room

Lane expects to see this scheme extended again further into 2021. The economic recovery will take time, he notes.

“In Victoria, we still can’t get to the pub.”

And, while it may not become permanent policy, he does suggest it may mark some acknowledgement of the role fintechs and alternative lenders have to play in the Aussie economy.

“The intention is to ensure that SMEs have access to capital so that they can grow their business and contribute to the GDP of the country,” he explains.

“The government recognised that, pre-pandemic, there was a large gap in terms of the amount of funding SMEs wanted and the amount they could get,” he adds.

“And they recognised that fintech played an increasingly prominent role in providing alternative products in different ways.”

But, there’s an elephant in the room here. When it comes to sourcing capital for lending out, alternative lenders and banks are not exactly on a level playing field.

“The market share or the proportion of loans written by fintech lenders pre-coronavirus was exponentially increasing, relative to banks,” Lane says.

“But the most predominant factor for lenders like us, and lots of other fintechs, is cost of capital.”

In the early days of the pandemic, the Reserve Bank of Australia announced a $90 billion term funding facility for banks, with the directive it should lend to SMEs.

That allowed large institutions to access capital at an “incredibly low cost”, Lane explains.

“The non-bank lenders have just got no hope of accessing capital at that low of a cost.”

The changes are a “nod of approval” for non-bank financial institutions.

“But the biggest burden of the free flow of capital out to SMEs is the cost of that capital,” he adds.

“Fintechs have a massive role to play in the post-coronavirus economic recovery.

“But the materiality of the impact they can have will be constrained by the cost to capital.”

Lenders who want to participate in phase two of the SME guarantee scheme can register their interest here.

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