Between the bushfires and the pandemic, many Australian companies have experienced a significant drop in revenue and have had to make employees redundant. Although JobKeeper has enabled them to keep some of their people employed, the program is scheduled to end in September. Even if it continues at a reduced level of funding, CEOs who have cut back on all discretionary spending, reduced travel, renegotiated their lease, and have cut salaries are still concerned that they won’t have enough money to keep their current staff employed, let alone the funds required for their company to rebound.
In addition to JobKeeper, there are quite a few federal and state programs designed to help companies rebound.All states are providing cash grants, some of which need to be matched 1:1 or 2:1. Some states, such as the Northern Territory and South Australia, are subsidising programs that teach CEOs how to rebound and grow. The good news is that this money does not need to be repaid; rather, governments want companies to grow and “pay back” the money in the form of new jobs created and more taxes paid.
Should you borrow money to keep going?
Companies that do not have a plan, or aren’t selling what their customers want, will find it difficult if not impossible to bounce back. While a loan can help a business get through a rough patch, it will not save a company. The Commonwealth Government and Reserve Bank want as many small and medium companies as possible to stay in business, rebound and grow again, but sadly, not all will survive, and a loan may simply delay the inevitable. For this reason, it’s important for business owners to be brutally honest about their company’s chance of survival, decide whether they want to keep working this hard, or whether it’s time to close down, turn the page, and start a new chapter.
On the other hand, there are many company owners who have plans, are offering what customers want, and are focused on getting through this downturn and rebounding. They are putting in new systems, undertaking market research, revising their marketing, and changing the way they manage the business to become more efficient. For these companies, a loan can provide the immediate cash required to buy the IT systems and equipment, change the marketing, hire the people, and do what’s needed to strengthen the company.
Understanding the options
When CEOs are weighing up whether or not to borrow, they need to consider the different kinds of loans, whether they are eligible, what the terms are, whether they need to provide collateral, e.g., their house, and when repayments would be due.
The size and type of loans that Australian SMEs can access will depend on how much cash is needed, how the money will be used, and whether the money is required immediately. There are equipment loans, property loans, and business loans that provide the money needed to purchase equipment, property and buildings, or pay staff, rent and electricity. A loan can be taken out for a fixed period, with money being transferred immediately into the company’s bank account, with the company making regular P&I (principal and interest) payments to pay off the loan by the end of the term. On the other hand, if money is only needed now and then to cover ad hoc cash shortfalls, then an overdraft may be a better option. This kind of loan can be accessed as needed and paid down in the months when extra cash is available, thus minimising interest payments.
In response to the pandemic, the Reserve Bank of Australia and the Australian government have made $40 billion available through the SME Guarantee Scheme for banks to loan to SMEs with a turnover of less than $50 million, who have experienced a 30% fall in revenue, and are based, registered, and operating in Australia. These loans are designed to provide “working capital” for businesses and do not require a personal guarantee (e.g., house or other assets). Although interest on the loan begins accruing the day funds are borrowed, no loan or interest payments are due until the end of September 2020, and in some cases until January 2021.
Which companies are eligible?
The biggest question most CEOs have is whether their company will be eligible for a loan. Some assume they won’t be and don’t even talk with a bank. When determining “eligibility”, a banker will look at four things. The first is the character of the business and its owner. Business size, age, public persona, products or services sold, and prior connections with the bank all give insights into the character, longevity, and trustworthiness of the business, as well as the owner, and the likelihood the company will pay back the loan.
The banker will also want to know who the company’s customers are, whether they pay on time, what cash flow looks like over the coming months, and will study the company’s profit and loss statement and balance sheet (which will hopefully show more assets than liabilities). All this will help the banker determine whether the company will have the capacity to pay back the loan, plus interest. The banker needs to feel comfortable that when the loan payments are due, there will be enough cash coming in to pay the interest and repay the loan. For this reason, the banker will want to see marketing and financial plans, as well as the overall business plan, and will want to understand how and when a company will be able to pay back its loan.
CEOs/owners should be prepared for a banker to ask critical questions, but it’s important not to take this personally. Most companies’ capacity to pay their bills has been severely impaired by the pandemic, so few criteria will get a perfect “10”. But bankers need to know how funds are intended to be used to strengthen the company, as well as the plan for paying back a loan with interest, while (hopefully) keeping current employees, hiring others, and planning for the next stage of growth.
For video streaming services and manufacturers of camper vans, the pandemic has provided a new opportunity for rapid growth. But for the majority of companies that haven’t been quite as lucky, their ability to rebound will depend on if they come out of the pandemic with the basic building blocks in place. Grants and loans are designed to provide the funds needed in the short-term so a company can rebound and grow again in the long-term.
Dr Jana Matthews is the ANZ Chair in Business Growth, Professor, and Director of the Australian Centre for Business Growth at the University of South Australia’s Business School.