Small business calls for HECS-style loans scheme

Ayesha de KretserSenior Reporter

Small Business Australia is lobbying Canberra to ditch the small to medium enterprise loan recovery scheme and replace it with a system modelled on the higher education contribution scheme (HECS).

Head of Small Business Australia Bill Laing said Federal Treasurer Josh Frydenberg’s current SME loan scheme had been a failure because businesses were scared to take on debt with so much uncertainty over their income.

Head of Small Business Australia Bill Laing. 

“What we’re hearing from small businesses is that they won’t take on risk with a fixed term given the level of uncertainty at the moment,” said Mr Laing.

Working with the father of Australia’s groundbreaking HECS, Bruce Chapman, Small Business Australia has devised a system whereby small business owners could defer loan repayments until their income reaches pre-pandemic levels.

Mr Chapman, an emeritus professor with the Australian National University, has taken the scheme to bureaucrats in Canberra but has so far been met with resistance.

In a research paper, Mr Chapman said many businesses are scared to take up the treasurer’s SME loan scheme because of their own personal liability, often using their own homes as collateral. By mid-December, banks had lent just $7.3 billion through the scheme, far below the $40 billion originally touted in loan relief.

“A major reason that this type of loan has had low take-up from business is risk, risk of business failure, risk of bankruptcy, and the risk of all the associated personal trauma related to such an outcome for the managers involved,” Mr Chapman wrote.

We are in the most uncertain financial times ever and, in such an environment, it is completely sensible for business managers to not access SME Recovery Loans because of the understandable concerns of not being able to repay debts when their future financial circumstances might well preclude this. If they can’t repay these loans because of low revenue, they will be moribund, bankrupt, and consequently with their personal futures being quite terrible.”

While the current scheme is being administered by the banks and 50 per cent is guaranteed by the government, many businesses are scared to leverage up given the level of uncertainty surrounding the pandemic.

“There’s a need for business owners to avoid personal bankruptcy,” said Mr Laing.

“The rest of that 50 per cent is effectively guaranteed by the small business owner’s personal assets.”

Nearly three quarters of 2849 SMEs surveyed by Small Business Australia said they supported measures to protect them from the legal consequences of bankruptcy in terms of being able to open a new business.

Mr Chapman said a revenue contingent loan (RCL) was a more apt solution because it would give businesses certainty they could repay, without risking their personal assets, which Mr Laing said often means putting their own homes up as collateral for loans.

“A business provided with an RCL will receive financial assistance at the time, now, and will commit to the repayment of the debt depending not on a schedule defined by time, but instead would be contingent on the capacity of the business to do be able to repay, as reflected by the firm’s future revenue stream,” Mr Chapman said.

“For example, the debt might be recovered at the low rate of 5 per cent of annual revenue, meaning that when a firm is completely locked down all repayments would be excused, and there would be very low repayment obligations when times remain tough.”

Mr Laing said the current scheme isn’t reaching businesses that might need it because it relies on banks assessing their creditworthiness, a time when their income is being hit by the COVID-19 pandemic and uncertainty is high.

Mr Chapman said unlike JobKeeper, there was no risk a revenue contingent loan scheme would end up in the hands of companies that didn’t need it.

“Of course, when things in the future are healthy for a business RCL repayments would be higher accordingly, which is good news for the government’s budget. And, unlike as has turned out with JobKeeper, there is no prospect of prosperous businesses being unfairly gifted at taxpayer expense,” Mr Chapman said.

Mr Laing said the scheme could be quickly rolled out through the Australian Taxation Office.

“There’s no reason why it couldn’t be implemented by the ATO very quickly,” Mr Laing said.

Mr Laing said the way the current scheme is being administered via banks also creates issues in fairness around access.

“It still requires a credit assessment by the banks and if a business is really suffering, it’s not going to get the funding,” he said.