Is the Loan Guarantee Scheme a Covid-19/Lockdown Lifeline for SMEs?

18th May 2020

Dear fellow entrepreneurs

IS THE LOAN GUARANTEE SCHEME A COVID-19/LOCKDOWN LIFELINE FOR SMEs?

Last week Tuesday, certain commercial banks opened up applications to implement the National Treasury and the Reserve Bank’s “Covid-19 guaranteed loan scheme” to help small and medium-sized businesses with an annual turnover of less than R300 million.  But will this loan scheme really assist distressed businesses and be the much-needed lifeline to survive?  Let us unpack some detail about what this loan scheme is all about and the qualifying criteria your business needs to meet to be eligible.

WHAT IS THE COVID-19 LOAN GUARANTEE SCHEME?

Government has partnered with certain commercial banks to provide financial support to small and medium-sized businesses to meet some of their operational expenses.  Government and commercial banks are sharing the risks of these loans.  Initially, the National Treasury has provided a guarantee of R100 billion to this scheme, with the option to increase the guarantee to R200 billion if necessary.

HOW HAS GOVERNMENT AND COMMERCIAL BANKS STRUCTURED THIS SCHEME?

The National Treasury has provided a R100 billion guarantee to the Reserve Bank.  The Reserve Bank will in turn lend money to commercial banks at the repo rate (currently 4.25 per cent) plus a 0.5 per cent credit premium.  Banks will lend this money to small and medium-sized businesses at the repo rate plus a fixed 3.5 per cent (currently 7.75 percent, equal to the prime lending rate).

HOW CAN YOU ACCESS A COVID-19 LOAN FOR YOUR BUSINESS?

If your distressed business is eligible, you should make application to the primary or main bank that your business banks with.  Participating banks at the moment include First National Bank, Standard Bank, Nedbank, ABSA, Investec and Mercantile Bank.

WHAT ARE THE QUALIFYING CRITERIA FOR BUSINESSES?

  • Annual turnover of less than R300 million (measured at group level);
  • Be in good standing with its bank (this means that the business must be up to date with its other loan payments or be an account holder without loans as at end February 2020);
  • The business must have an existing relationship with the bank granting the loan;
  • The business must be registered with SARS for all relevant taxes;
  • The business must be financially distressed as a result of the Covid-19 lockdown;
  • The business has no existing capacity to borrow in order to alleviate financial distress. This means that the business does not have an existing overdraft facility or other general short-term banking facilities that it can use for working capital purposes;
  • Businesses can either trade in a company (profit or non-profit), close corporation, sole proprietorship, partnership, trust or statutory body corporate;
  • The business can only apply for one Covid-19 loan from one bank.

WHAT ARE THE CONDITIONS ATTACHED TO THE COVID-19 LOAN?

  • The loan can only be used for operational expenses such as ordinary trading and service supplier payments, rent, utilities and salaries for a period of three (3) months;
  • Businesses may not use these loans to pay dividends or bonuses and shareholders loans, and repayment of these loans are restricted until the Covid-19 loan has been repaid in full;
  • Business may not use these loans to pay off other loans that the business might have, for example debt owed to SARS, instalment sale agreements and so on;
  • The loan amount cannot be used to pay retrenchment packages;
  • Business may not use this loan to make investments;
  • Each business is only entitled to one loan under this guarantee scheme;
  • Banks are entitled to request business owners to provide personal security or suretyships for this loan and may impose additional conditions as each bank deems fit;
  • Banks are not obliged to extend the period of Covid-19 loans.

WHAT ARE THE REPAYMENT TERMS OF THE COVID-19 LOAN?

  • Banks may advance the loan to the business in up to three (3) monthly instalments;
  • After the first initial three months, no payment is required from the business for a further three months – this means that no repayments of the loan is required in the first six (6) months;
  • The business has five (5) years or sixty (60) months to pay off the loan and associated interest, in affect the repayment period is sixty-six (66) months with the first 6 months being a payment holiday;
  • The interest rate is fixed at the repo rate plus 3.5%. Banks cannot vary this condition.  This means that the interest rate will change when the repo rate changes;
  • Interest will accumulate from the date on which the first drawdown on the loan occurs.
  • No additional administration and or initiation fee will be charged on these loans.

WHAT APPLICATION INFORMATION DO THE BANKS REQUIRE FROM APPLICANTS?

Banks will use their risk evaluation and credit application processes to approve or decline loans and therefore, banks have discretion on whether they wish to extend a Covid-19 loan to an applicant.  On researching the various bank application forms for a Covid-19 loan, the following common thread of information has been observed that businesses will need to supply to their banks when applying:

  • Latest annual financial statements with the accountant’s report signed off by a professional accountant (financial years ending February 2019 and after);
  • Management accounts from the month following the annual financial statements to the current month, reflecting monthly and accumulative turnover, variable costs, fixed costs (expenses), current debt repayments and net profit before tax;
  • Financial projections for the next 12 months, reflecting operational expenses for which a loan is required, broken down by:
    • Salary and wages payments;
    • Rental and lease agreements;
    • Supplier and out-sourced service payments;
    • Utility payments, such as telephone, electricity, etc.
    • Other operating expenses, such as insurance, security, cleaning costs, etc.
  • Cash flow projections for the next 12 months;
  • Loan amounts will be assessed based on the business’s operating expenses for a period of three (3) months; no maximum borrowing limit has been defined;
  • Proof of turnover/income may be requested based on the bank’s assessment and verification criteria;
  • Statement of business owner’s assets and liabilities (for owners willing to provide surety).
  • Statement by owner as to how the business has been directly impacted by Covid-19 and the lockdown.

WRAPPING UP

If the business’s total debt levels are not aligned with the capital structure (owner’s equity) of the entity, by the bank approving a Covid-19 loan, the business will effectively be placed into technically insolvency until such time as this loan has been repaid in full, as the additional debt or liability of the loan will effectively exceed the business’s assets.  For this reason, banks will demand personal sureties from the business owner/s if they are to extend financing.

Finally, to qualify for a Covid-19 guarantee loan, the business must be able to substantiate after-tax profits that are sufficient enough to service monthly capital and interest repayments of all debt, including the Covid-19 loan, but excluding shareholders loans.  This is done by way of the financial and cash flow projections you or your accountant prepares and required by the bank in the application information.

Ultimately, projected monthly turnover figures should be substantiated for authentication by the bank, therefore, we would suggest that a well-thought out marketing and sales conversion plan should accompany your application if your business is to succeed, not only to obtain financing, but to also survive these trying times going forward.

As the application process for the Covid-19 guarantee loan will force some small business owners who have not kept up to date with their financial record keeping, annual financial statements, SARS returns and marketing and sales conversion plans to radically change their ways and learn from these past  mistakes, the Covid-19 business application loan criteria and process will in itself be the change needed for these business owners – a lifeline indeed –  a chance to survive, and a second shot at thriving in the future by doing things right the first time.

With warm regards,

The BAN Team