Opinion: radical times call for radical measures — a HECS-style loan system for small businesses

By and

August 30, 2020


Australian small businesses have been impacted by COVID-19 to a much greater extent than larger businesses. Larger companies have bigger secured balance sheets which allow them to raise capital or debt through more preferable loan arrangements. Many small businesses do not enjoy such advantages.

This a significant problem: capital is the fuel that drives innovation and growth in small businesses. Without it, small business owners will be hampered in their efforts to provide goods and services, and grow in a post-COVID economy. Without capital assistance, many small businesses will not survive the current economic climate.

The SME Guarantee Scheme

Recognising these facts, the federal government has introduced the Coronavirus Small Business Guarantee Scheme (SME Guarantee Scheme). From April 2020 until June 2021, the government will provide a 50% guarantee of three-year loans valued up to $250,000 for small businesses with an initial six-month repayment holiday. This will fund up to $40 billion23 in loans. The government recently announced that the available loan size will increase to $1 million from October 2020 and increase the repayment period to 5 years.

This scheme represents an unprecedented level of support for Australian small businesses. The government has moved with exceptional speed to support a critical sector of the economy that has suffered during COVID-19. The government’s responsiveness to the needs of small businesses is also exemplified by the JobKeeper scheme, and the recent changes to broaden its availability in response to the lockdown in Victoria.

However, while the SME Guarantee Scheme was an unprecedented reaction to the current economic crisis, with good intentions at its heart, it has mostly failed in its aim to provide small businesses with access to flexible and low interest capital. While $40 billion was made available for this scheme, just $1.5 billion has been utilised. A combination of low business confidence, poor loan administration by banks and the underlying conditions of the loans themselves — as outlined below — have produced this failure.

Three reasons why a HECS style loan would be superior

In a recent report, Blueprint Institute argued that a HECS-style, revenue-contingent loan system would be a more effective method of capital assistance for the small business sector. There are three main reasons for this.

Firstly, in these uncertain economic times small businesses do not have the confidence to take on traditionally structured debt. This is especially the case in light of the Victorian COVID-19 outbreak. Even if the SME Guarantee Scheme offered loans with lower interest rates over a longer repayment period, it is unlikely that small businesses will take up these loans at the level required to spur growth and investment across the economy.

This is illustrated by the example of the 2019 Bushfire Loan Scheme. These loans were offered at exceptionally low interest rates with long repayment periods, but uptake remained very poor. Just 21,405 businesses of the 600,000 eligible received a Bushfire loan or grant. One could argue that the poor uptake of the bushfire loans was a result of inadequate communication from the government. However, given that this poor uptake has been mirrored in the SME Loan Guarantee Scheme, it is more likely that the underlying issue relates to small businesses being unwilling to take out traditional loans in an uncertain operating environment.

Secondly, small business industry experts report that banks are simply not well placed to administer the current SME Loan Guarantee. They note that banks do not have experience in delivering unsecured loans. In some cases, we heard of banks requiring personal guarantees from business owners for access to these loans. The government designed these to be unsecured; personal guarantees undermine the scheme’s fundamental purpose. It is difficult to see how even a reformed SME Loan Guarantee Scheme could overcome such issues — to succeed, the government would need to lead a structural change in the way large financial institutions interact with small businesses — both from a cultural perspective, and by altering responsible lending requirements. This is unlikely to occur in the short term.

Finally, perhaps some would argue that we should reform the SME Guarantee, rather than adopt a HECS-style loan system. Perhaps the government could underwrite more than 50% of the loan (say, 75% of the total value) or work with the banks to reduce interest rates offered to small businesses. While this would reduce the administrative burden and the government’s own risk, tweaking the SME Guarantee Scheme is unlikely to solve structural problems within the program nor adequately benefit small businesses.

Time for action

Through our research and engagement with the small business sector, Blueprint Institute concluded that additional stimulus for small business is required. With the government already committing significant funds to maintaining jobs in small businesses through JobKeeper, improving access to flexible capital arrangements is likely to improve the efficacy of such spending by saving viable businesses and helping them grow. Shifting the method of delivery to a HECS-style scheme will simply allow funding, which the government has already acknowledged the sector needs, to flow to small businesses.

Through a HECS-style loan, the Australian government can better deliver on one of the great promises of our liberal democracy — to reward entrepreneurship, hard work and aspiration. For those small business owners with innovative ideas about how they can provide new goods and services in a post-COVID economy, an injection of capital would be an opportunity to invest and grow their business with the peace of mind that the loan will only be repaid from future revenue. A HECS-style loan for small businesses could drive increased innovative activity and job creation, resulting in higher levels of productive economic activity and speeding up the nation’s economic recovery.

About the authors
Inline Feedbacks
View all comments
The Mandarin Premium

Insights & analysis that matter to you

Subscribe for only $5 a week


Get Premium Today