Business Loans

Government Guarantee Scheme 101

31st Mar 2020 | Ben Pauley


This morning I am sitting at the PC with my daughter on my lap absolutely chuffed we are meant to be getting some good weather today. The hope is that running around outside for the afternoon will tire her out and we might get a good nights sleep!

I wanted to talk today about the Business Finance Guarantee Scheme that is being put in place to support businesses throughout the Covid 19 crisis.

I touched on this a last week in one of my blogs, the government has put in place a scheme where they will provide a guarantee to banks against loans provided to SME’s to support them through the crises. There are some caps, in that the loans must be for no more than $500k, the maximum term is 3 years and the business must turn over >$250,000.00 per annum.

Of those loans the government will hold 80% of the risk of loss whilst the banks 20%. What this means is that if a client defaults on a loan then the bank will be able to claim 80% of the loss back from the government, they will not wear that on their books.

The purpose is to give the banks confidence to lend money to businesses who at the moment may be struggling. The banks simply do not carry the full risk of loss. There is however some misconceptions about how this will work and I wanted to address 3 of those here and then give you some tips on how to prepare for an application.

This is not a loan directly from the government to you as a business. The loans are still being provided from the main street banks to the client and you will still need to prove yourself as a ‘solvent’ firm. These loans will sit on the banks balance sheet and be charged at market prevailing rates (based on the risk profile of the loan – I will write something on this later in the week). The government will only be involved if the client defaults on a loan where they will cover 80% of the cash loss to the bank which brings me to my next point.

The government is not bailing you out. If you default on one of these loans you will NOT simply have the loan wiped and be able to ride off into the sunset. It will be considered a true default and the bank will pursue you and the business for the balance of the loan. It is therefore important that you carefully consider the loan you are taking and your businesses capacity to meet those commitments.

This is not a ‘right’ and you must follow a credit process. These loans are still being assessed under traditional lending criteria and the legislation passed stipulates they can only be provided to ‘solvent’ firms. You therefore will need to prove not only the why but also the merit of you borrowing that money and capacity to repay it. You must present this well to the bank otherwise you risk them not proceeding with the loan.

So, some tips on how to prepare yourself / an application for this lending.

Speak to your accountant. The bank will want financial information to support this request. You will want to be able to provide them up to date trading accounts (including a balance sheet) and also some forecasts. I would look at putting some sensitivity on the forecasts around what a 4 week, 8 week and 12 week lock down look like for your business. Your balance sheets should include a PnL, Balance sheet and cash flow and should go out at least 12 months.

Put a plan in place. You want to be presenting a coherent proposal to your bank and this will include a plan on both how you are going to get through the tough times and what you will do out the other side to ensure you can meet those loan commitments. Don’t leave the current 4+ week period unaddressed, discuss what your contingencies are if the lockdown is extended for a further 4+ weeks, what you are doing with staff, is your rent fixed etc.

Explore all your options. This is an extension of having a plan, but do show the bank that you have looked at what other options you could take to ease the burden on the business. In particular to the bank it could be a simple restructure of existing commitments to allow some relief rather than additional debt. It could be some rental relief from your landlord, dropping your staff’s wages, deferring some tax or possibly selling an asset. Don’t be afraid of the tough conversations.

Speak to a financial advisor. This is a bit of a shameless plug, but I can’t stress enough the importance of working with a good broker / advisor at these times. I often speak to clients and hear of people who have struggled when going directly to their bank and having someone on your side who at the least can speak the lingo and navigate their way through the bank will be of huge value.

Given some of the complexity involved with this deal I would expect it will be towards the end of this week before all banks have this fully in place ready to go. Per the above though there is some work for us all to do to get ready.

Reach out today if you want to discuss it further.

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