Small business revenue-contingent loans would boost confidence: Ombudsman

THE Australian Small Business and Family Enterprise Ombudsman, Kate Carnell said small businesses would be more likely to take out a revenue contingent loan, than seek finance under the government’s current small-to-medium enterprise (SME) loan guarantee scheme.

The small business revenue contingent loan, as recommended in the Ombudsman’s COVID-19 Recovery Plan, would be Federal Government-funded and capped at a percentage of the small business’ annual revenue.

Repayments would be required once turnover reached a designated level and calculated on a percentage of turnover.

“Access to finance is critical to small business survival, particularly with a number of support measures scheduled to end or begin phasing out in the coming weeks” Ms Carnell said. 

“Right now, small businesses are scared to take on any additional debt because they don’t know what’s around the corner and how any possible further lockdowns might impact their capacity to make loan repayments.

“A revenue contingent loan would operate in a similar way to HECS, with small businesses only required to start repaying once turnover recovered to an agreed level. If revenue was to drop below that level, payments would cease," Ms Carnell said.

“Even in the best of times, many small businesses struggle to secure finance, with a recent Sensis report revealing that of the dwindling number of small businesses that applied for a loan in the past three months, about one in four had been knocked back.

“That research also showed about three-quarters of SMEs surveyed reported a drop in revenue, with more than 40 percent expecting sales to decline significantly.

“Even with Government taking on 50 percent of the risk under its loan guarantee scheme, loans continue to be subject to bank credit assessment processes, which means small businesses with falling revenue have an uphill battle to secure finance," she said.

“Of course, the proposed revenue contingent loan would require businesses to satisfy a viability test to be conducted by an accredited financial adviser.

“A revenue contingent loan would give small businesses the confidence they need to seek funding to get them through this crisis, so they can grow and employ.”

www.asbfeo.gov.au

ends