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High price for Government loan guarantee

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Small to medium-sized enterprises (SMEs) will pay a high price for a State Government partial guarantee of new bank borrowings designed to “unlock capital and create jobs”.

Department of State Development guidelines published recently reveal that SMEs participating in the program will have to pay the Treasurer a “guarantee fee” of between 2 per cent per annum for the first three years of the guarantee, rising to 3 per cent for the subsequent two years, and 5 per cent beyond five years.

With the minimum borrowing eligible for the guarantee being $500,000, SMEs would face annual costs of $10,000 to $15,000 on top of the thousands of dollars of bank interest already being paid on the loans.

Under the Unlocking Capital for Jobs Program, the State Government guarantees 20 per cent of an SME’s borrowings in the event that the company cannot meet its repayments and defaults on the loan.

Put simply, a bank’s risk is reduced by the fact that the Government will repay 20 per cent of a bad loan.

Given that the Government will not be paying out any guarantees to banks unless an SME defaults, InDaily asked Treasurer Tom Koutsantonis the purpose of the guarantee fee.

“The guarantee fee helps contribute to the administrative costs of delivering the program and compensates in part for risk transferred to the state,” a spokesperson for the Treasurer said.

Asked if $10,000-$15,000 was a reasonable and viable additional cost for SMEs to carry on the minimum loan of $500,000, given they were already paying bank interest, the spokesperson replied: “The Government’s guarantee fee charge is in line with similar guarantee fees charged by financial institutions.

“The provision of the guarantee should have a positive impact on the rate at which the SME is able to borrow. Had the SME borrowed without the guarantee (effectively unsecured money from the bank), the interest rate charged by the bank would have been significantly higher and it’s unlikely that the bank would fund the project.

“This program will make it easier for SMEs to secure commercially viable loans where they would otherwise not have the balance sheet strengths to access adequate finance, allowing them to bring forward plans for expansion or transformation.”

While the upper limit of the loans eligible for the guarantee is $10 million, the Treasurer has the discretion to consider applications involving loans of up to $20 million.

The Government guarantee applies only where an SME “satisfies the bank’s normal commercial lending criteria except for the requirement of available collateral as security”.

Budget Paper 3 reveals the extent to which SMEs have taken up the Unlocking Capital for Jobs Program to date.

“Current exposure is $3.5 million out of the $50 million program limit,” the Budget paper says.

The Treasurer’s spokesperson said “one application has been approved so far and five more companies have expressed interest in the program”.

“The applicant – Australian Fashion Labels – borrowed $19 million of which $17.5 million was new borrowings and, as such, they were entitled to a government guarantee of $3.5 million.”

Australian Fashion Labels – which has five fashion labels in Finders Keepers, Cameo, Keepsake, Jaggar and The Fifth and sells to more than 3500 stockists worldwide – will expand its South Australian operations, establish a new global head office in Adelaide’s CBD and create up to 50 new jobs by 2016 with its additional capital..

The DSD guidelines require SMEs to demonstrate the number, location and timelines of new jobs and describe how its expansion or transformation plans will impact on the long-term sustainability of the business.

The funds borrowed can be used to finance equipment and buildings purchases, or for working capital.

The guarantee fee of between 2 per cent and 5 per cent compares with business loan interest rates from banks which range from around 4.5 per cent to 6 per cent.

The Unlocking Capital for Jobs Program was announced with much fanfare in early August 2014 but did not become operational until March 20 this year.

The Treasurer’s spokesperson said the delay was the result of “a significant amount of time and negotiations with participating banks to lock in the specifics of how the program will operate”.

 

 

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