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The SME Recovery Loan Scheme can help your business

SME Recovery Loan Scheme

In October 2020, the Australian Government rolled out the Coronavirus SME Guarantee Scheme Phase 2 targeted at SMEs receiving JobKeeper.  The Government has now announced a new SME Recovery Loan Scheme that will allow lenders to provide cheaper credit and allows SMEs to access funding they need to recover and invest in their future.

The initial SME Guarantee Scheme was rolled out in two phases.  Phase 1 provided SMEs with unsecured loans to manage disrupted cash flows during the COVID-19 pandemic and lockdowns.  Phase 2 commenced on 1 October 2020, amending the scheme’s parameters to continue supporting lenders in providing credit for SMEs at low interest rates.

How does the SME Recovery Loan Scheme differ from Phase 2?

The new SME Recovery Loan Scheme supplements the SME Guarantee Scheme, greatly increasing potential loan amounts.  Additionally, SMEs will now be able to repay their loans over a longer period of up to 10 years.  Applications for this new scheme will run from 1 April 2021 to 31 December 2021, with prior Phase 1 and 2 applicants also being eligible for this new scheme.  For those SMEs without Phase 1 or 2 loans, those who are receiving JobKeeper payments between 4 January 2021 and 28 March 2021 will be eligible. 

The SME Recovery Loan Scheme is fairly similar to Phase 2, with increases to loan amounts & repayment periods.  Furthermore, the business turnover limit for eligibility has increased whilst interest rates have been reduced.  These benefits make can make it useful for businesses to refinance their existing SME scheme loans.

A summary of the differences between the two schemes can be found in the following table:

Differences between the SME Guarantee Phase 2 & SME Recovery Loan

SME Guarantee Phase 2
SME Recovery Loan
Eligible Businesses
SMEs, including sole traders & not for profits with a turnover of up to $50 million
SMEs, including sole traders & not for profits with a turnover of up to $250 million
SMEs that access loans under Phase 1
SMEs that accessed loans under Phase 1 or 2
SMEs receiving JobKeeper Payments between 4 January 2021 & 28 March 2021
Loan Limit
Up to $1 million
Up to $5 million in addition to the Phase 1 ($250,000) & Phase 2 loan limits
Application Period
1 October 2020 to 30 June 2021
1 April 2021 to 31 December 2021
Loan Terms
Up to 5 years
Up to 10 years
Holiday period (No repayments)
At the discretion of the lender
Up to 24 months on principal and interest (interest still accrues on loan during this period)
Security
Unsecured or Secured (excluding residential property)
Unsecured or Secured (excluding residential property)
Government-Lender Split
50% – 50%
80% – 20%
Interest Rate
Determined by lenders but capped around 10%. Some flexibility for variable rate loans if market rate increases over time.
Determined by lenders but capped around 7.5%. Some flexibility for variable rate loans if market rate increases over time.
At present (March 2021), you will find most rates to be around the 4-5% mark.
At present (March 2021), you will find most rates to be around the 4-5% mark.

What items are eligible or ineligible for the SME Loan?

When applying for a SME Loan, borrowers must disclose the purpose of the loan.  It is important to know what you can and cannot use the loan for.  A breakdown of eligible and ineligible items for both types of SME loans is available below:

Ineligible items for the SME Loans

The following items are ineligible for both the SME Guarantee Scheme Phase 2 Loan and the SME Recovery Loan Scheme: 

  • Credit cards
  • Charge cards
  • Debit cards
  • Business cards.
  • Purchase of residential property
  • Purchase of financial products
  • Lending to an associated entity
  • Leasing, renting, Hiring or Hire purchasing existing assets that are past the half-way point of their effective life.
Ineligible items - Credit Cards

Eligible items for the SME Loans

The following items are eligible for both the SME Guarantee Scheme Phase 2 Loan and the SME Recovery Loan Scheme: 

  • Supporting investment
  • Purchase of non-residential real property (e.g. commercial property)
  • Other suitable products offered by the lender that meet eligibility requirements

Phase 2 Loans can also be used for:

  • Refinancing existing loans from Phase 1
  • Refinancing Phase 2 loans between different participating lenders during the period of 1 October 2020 to 30 June 2021

SME Recovery Loans can also be used for:

  • Acquisition of another business
  • Refinancing existing loans (including loans from the SME Guarantee Scheme).  However restrictions apply to prevent refinancing on:
    • loans that are more than 30 days in arrears
    • borrowers who have entered external administration, or are insolvent

Refinancing your SME Guarantee Loan

How do I apply for a SME Loan?

SME loans will be offered through participating commercial lenders.  The government is not directly participating in the lending process, they are subsiding the loan amount with the lending entity.

The lender will make a decision on whether to extend credit and management of the loan.  If your application is declined, you may approach other lenders.  Additionally, other lenders may offer better products or terms, so it is important to shop around with participating lenders.

Important information about SME Loans

Interest Rates

When providing a loan, lenders must disclose the effective interest rate, as well as if it is variable or fixed at the agreement date.  Additionally variable rate loans must have the margin and underlying base rate disclosed.

Securities

Under these schemes, both unsecured or secured loans can be provided at the discretion of the lender.  However, secured loans will not be able to take residential property down as a security. All other types of securities may be taken for the loan. Additionally, lenders are permitted to take guarantees for the loan.

Repayment Holidays

Repayment holidays do not prevent interest from accruing on the loan.  For the duration of the repayment holiday you won’t have to make any repayments, but interest will still be charged during this time.

Can POP help me with my application?

If you need assistance, POP offers 30 minute consultations starting at $100 where we can assess your business situation and make sure your finances are up to date for your application.  

We would recommend that you prepare at minimum a one-year cash flow forecast to assist with your cash flow expenditure and business growth plans. POP offers this service starting from $1,500 plus GST with our clients finding this extremely valuable from a cash flow perspective and a lending perspective.

Please reach out to our friendly accountants on 1300 180 630.  Alternatively Book in your consultation so you can get the answers you need today!

Patrick Sargent

Patrick Sargent

Patrick Sargent is a Chartered Accountant and registered Tax Agent who is passionate about helping business owners and individuals achieve their goals. He co-founded the cloud and tech-focused accounting firm POP Business back in 2018. Since then, Patrick and his team have won numerous awards and accolades including the 30 Under 30 ‘Tech Innovator of the Year’, and coming in as a finalist in the Australian Accounting Awards 2020.   He has expertise in helping small businesses with a range of accounting services, including tax preparation, financial advisory, accounting and bookkeeping, and personal tax planning, as well as company, trust, and partnership tax returns and more.

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