22 March 2020

Global action by central banks and governments has helped stem some concern over access to capital and business continuity. Closer to home, the Reserve Bank of Australia (RBA), along with support from the Federal Government, has proposed several measures aimed at reducing the disruption to businesses across the Australian economy.

The funding sources that have been announced are targeted for new lending, not necessarily existing loans. And while available to all businesses, the measures are clearly focused on the small to medium enterprise (SME) sector with incentives in place for lenders who increase lending to this sector.

These policies are being developed and reviewed at a rapid pace. Below is the latest summation of the current policy positions in Australia:

$90B Term Funding Facility (TFF)

The RBA announced this week a $90 billion facility that can be accessed by Approved Deposit Institutions (ADIs) for the purposes of new lending to the Australian business community. It includes:

• A three-year fixed facility with a base rate to ADI’s of 0.25%.

• Guarantee by the RBA that it will maintain the overnight to three-year cash rates via the open market operations as needed.

• Availability of initial funds to ADI’s which is equivalent to 3.0% of their current lending book.

• Additional funds available for new lending.

• SME lending volume, which has a five-to-one multiple to lending to large corporates.

• Ability to access funds which will accrue interest but will only be payable on maturity.

• Streamlined bank approval processes.

The Federal Government is also moving to support smaller lending institutions with a $15 billion facility to alleviate potential funding avenues for these institutions. These funds will be available to smaller ADIs and non-ADI lenders. This facility will be managed by the Australian Office of Financial Management (AOFM).

This policy announcement addresses one of the key issues experienced by lenders during the Global Financial Crisis (GFC) whereby the lender’s own borrowing rates escalated quickly, and they were forced to pass these costs onto borrowers.

In addition to the above measures, the government is now effectively setting itself up as a loan guarantor. It has also announced that small businesses who enter into an unsecured loan of up to $250,000 in the six months starting 1 April 2020, with banks who join the scheme, will have repayments delayed for the first six months of the loan. Additionally, the government will guarantee 50% of these loans, making it easier for banks to provide funding. This $20 billion initiative will effectively allow $40 billion of capital to be freed up for small businesses.

“The government’s actions will enable customers of smaller lenders to continue to access affordable credit as the world deals with the significant challenges presented by the spread of coronavirus.” – Josh Frydenberg – Federal Treasurer

Australian Banks defer loan repayments for six months

Australian banks have moved to offer a deferment of loan repayments for six months to businesses that are having difficulty meeting their current commitments. This is in addition to reducing lending rates for business customers.

The deferment, announced by the Australian Banking Association, allows businesses to navigate the next six months and has been valued as an $8 billion boost to corporate Australia.

Banks have reiterated their intention to introduce a fast track approval process to ensure customers receive support as soon as possible.

What lies ahead?

The Federal and State governments, the AOFM and the RBA are coordinating efforts to free up access to capital to support the business community. These efforts are particularly focused on the small to medium enterprise sector.

Small business owners should be focusing their attention and developing a plan for what lies ahead. Many businesses over the next six months will experience some sort of cashflow pressure, while others will experience sudden increases in demand, which may require funding solutions. You will only be able to navigate these fluctuations by being proactive, especially when dealing with banks and other lenders.

Lending and Finance tips to help guide your business:

1. Be prepared.

Make sure you have all the possible relevant information you need to hold the conversation with lenders.

2. Be honest and transparent.

The Government, RBA and banks are all keen to help clients work through the difficult times ahead, but transparency is key.

3. Cashflow planning.

Develop a realistic view of your business’ upcoming cashflows and a plan for the future. This is crucial for lenders to be able to work with your business to develop a solution.

4. Have reasonable expectations.

The measures outlined will go some way to helping the situation but they may not be the silver-bullet that will solve all your business’ issues so keep your expectations reasonable.

5. Ask for help.

With so much going on, you are not expected to do this on your own. Findex is working with clients to ensure they are kept up to date on policy changes and the potential impacts to their businesses. We are also on stand-by to assist with:

• Sourcing new avenues of funding

• Cashflow planning and analysis

• Covenant review

• Preparation for lender conversations

• Negotiation with lenders

If you require support accessing any of the support measures announced or assistance in dealing with lenders, please contact theFindex Corporate Finance Team.

Findex has developed a Government Stimulus Health Check and free Business Wellbeing Toolkit to help businesses manage potential risks and take full advantage of eligible stimulus assistance. Book your Health Check here.