Understanding the Coronavirus SME Guarantee Schemes
From March 2020, the Commonwealth government actioned the SME Loan Guarantee Schemes (‘Schemes’) to help alleviate the financial impacts of COVID-19 on small and medium sized businesses (‘SME’). The Schemes were rolled out in three phases with increasing degrees of assistance:
Coronavirus SME Guarantee Scheme Phase 1
Coronavirus SME Guarantee Scheme Phase 2
SME Recovery Loan Scheme
23 MAR 2020 to 30 SEP 2020
1 OCT 2020 to 30 JUN 2021
1 APR 2021 to 30 JUN 2022
80% guarantee in 2021
50% guarantee in 2022
Unsecured and secured loans
Unsecured and secured loans
Loan up to $250,000
Loan up to $1,000,000
Loan up to $5,000,000
Term up to 3 years
Term up to 5 years
Term up to 10 years
First 6 month payment holiday
Up to 2 years payment holiday
Interest capped at 10%
Interest capped at 7.5%
These loans are no longer available and as of November 2022, 104,000 loans had been provided totalling around $15.9 billion borrowed. Of that, $10.6 billion still remains outstanding. With the loan terms in Phase 1 having ended or already ending, how exactly are these loans being enforced?
Lenders claim against the Government Guarantee
For a lender to make a claim from the Commonwealth government under the Schemes, an Impairment Event must occur. An impairment is determined by the loan agreement and internal policies which may differ from lender to lender. Once a Lender determines that a loan is impaired, they can apply for a claim and give evidence of the impairment.
The claim application will be assessed by a Treasury Delegate: either a Secretary or a Deputy Secretary to be paid upon approval. For loans taken from 1 April 2021 to 31 December 2021, the lender may claim 80% of the loan amount including interest. For every other loan, the lender would be able to claim only 50%.
Lenders actions against the borrower
Though impairment is distinct from default, a default will likely impair a loan. Any findings of default and impairment will be determined on a case-by-case basis.
Under the Schemes, the government will guarantee up to 50% or 80% of the loan including interest, hypothetically making SME’s only liable for the remainder. Because this applies upon impairment, the loss that a lender may sustain may be greater than the guarantee amount. It is important to note that impairment by itself, unlike default, does not give rise to any legal rights for the lender to recover debt through enforcement action. Instead, any difference between the lender’s loss and the government guarantee amount can only be enforced against a borrowing SME when default occurs although as noted above, an impairment may arise due to a default and the same event may trigger both actions.
The conditions for going into default will be listed in the loan agreement itself, with typical events being failure to make a repayment and not complying with other obligations of the agreement. Lenders may offer a grace period to correct a failure but once an event of default is taken to occur, the lender may take enforcement action. The Lender may ask for repayment or an arrangement for repayment, take possession of security or commence enforcement against the guarantor.
In any case, a loan default or impairment can be difficult to navigate and legal assistance can be helpful to better understand your rights and obligations. If you have taken one of these loans and you need some advice, please feel free to contact Longton Legal. We have a team of experienced lawyers who can undertake a review of your situation and help you find the best solution.
*Disclaimer: This is intended as general information only and not to be construed as legal advice. The above information is subject to changes over time. You should always seek professional advice before taking any course of action.*
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