The government’s SME Recovery Loan Scheme is coming to an end. So who benefited?

With the SME Recovery Loan Scheme coming to an end on June 30, it is timely to reflect on its impact and the outlook for SMEs looking for finance in the months ahead.

Launched in March 2020, the scheme was introduced to enhance the ability of lenders to extend credit to SMEs. The first iteration was named the Coronavirus SME Guarantee Scheme under which the government provided a 50% guarantee to 44 approved lenders to encourage them to lend to SMEs struggling to deal with the effects of the COVID-19 pandemic.

The scheme provided for unsecured working capital loans up to $250,000, with terms up to three years with a six-month repayment holiday. 

After three months, just $1.6 billion of the $40 billion made available under the scheme had found its way into the hands of SMEs. So the eligibility criteria were expanded to increase the term of loans to five years, the amount that could be borrowed to $1 million, and the purpose expanded to include “investment”. This became Phase 2 of the scheme, which remained open until June 2021.

In early 2021 the Coronavirus SME Guarantee Scheme was renamed the SME Recovery Loan Scheme and the key feature of this phase was an increase in the government guarantee to 80%.

Under the SME Recovery Loan Scheme, loans were available until December 2021. From January this year, the fourth and final phase of the scheme saw the government guarantee reduced back to 50% and funds could be lent to businesses with a turnover up to $250 million

Measuring the impact of the scheme

When assessing the impact of the scheme, consideration should be given to the perspective of the key stakeholders being SMEs, lenders and taxpayers who have largely underwritten the scheme. 

How many SMEs have benefited?

Treasury data reveals that by May 2022, 77,100 loans for around $6.5 billion were made under the Coronavirus SME Guarantee Scheme, at an average loan size of $84,000. A further 23,000 loans for around $7.2 billion were made under the SME Recovery Loans Scheme, at an average loan size of $313,000.

So from March 2020 until May 2022, a total of $13.7 billion was lent to around 100,000 businesses at an average loan size of $137,000.

Given that there are 2.35 million small businesses in Australia, this means less than 5% accessed funding under the scheme. To put this into perspective, nearly half of all SMEs benefited from JobKeeper payments.

In broad terms the big banks lend between $2 billion and $4 billion to SMEs every month anyway, so $13.7 billion over 26 months is still substantial. But the imponderable question is: should this $13.7 billion be regarded as incremental, or would the banks still have advanced these funds without the government guarantee?”

Did the scheme help prevent SME insolvencies?

At the onset of coronavirus, lenders, lawyers and insolvency firms geared up for a widely predicted wave of SME collapses. As it turned out, insolvencies have remained relatively constant, in part due to other temporary insolvency protections introducing during the pandemic. It would be interesting to know how the 100,000 businesses that have benefited from the scheme are now trading.

Which lenders benefited?

Although data about the involvement of individual lenders is not made available, the scheme was more advantageous to the banks than non-bank lenders. 

The Term Funding Facility enabled banks to borrow $188 billion initially at 0.25% per annum, then 0.10% per annum. This bestowed an enormous funding advantage relative to their non-bank competitors. While alternative lenders did also benefit from the government guarantee, they have been at a disadvantage in funding scheme loans.

The number of lenders approved under the various iterations dropped and the average loan size increased, suggesting that as the scheme progressed the big banks did even more of the lending.

Will it cost taxpayers?

There is a history of governments burning taxpayers’ money trying to pick winners in commercial lending. By guaranteeing a portion of loans, the government was not directly picking winners but taxpayers still pick up the majority of the tab for the loans that go bad.

For this reason taxpayers are entitled to expect Treasury to provide details of the extent to which lenders call on the government guarantee to fund loan losses.

If 5% of loans went bad, this would cost taxpayers less than $500 million, which is a lot less than the $14 billion of Jobkeeper payments Treasury concedes went to businesses that didn’t deserve this support.

More information and time are required before a definitive conclusion can be reached on the impact of the scheme, however. 100,000 SMEs are likely to vouch for it and the benefits to the economy would appear to outweigh the cost to the taxpayers.

The closure of the scheme will eliminate one avenue of SME finance and with higher interest rates, rising labour costs and inflation, banks are not going to be any less cautious when looking to extend credit to SMEs.

Neil Slonim is an independent SME finance advocate from theBankDoctor.org, which is a not-for-profit small business advocate and commentator. You can sign up for his free newsletter, here.