Low-interest loans to help small business rebuild after pandemic, floods

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Small business owners have until June this year to take advantage of a special loan designed for those affected by the pandemic and last year's floods.

Under the federal government's SME Recovery Loan scheme, participating banks and financial institutions offer business loans with zero-to-low interest rates and with more flexible repayment terms.

The name of the product varies between lenders - and not everyone offers it - but if you're a small business owner who can demonstrate the impact of COVID or the floods on your business in 2021, you can simply contact your bank and find out the loan that falls under this scheme instead of a conventional business loan or extending your current loan.

sme recovery loans small business covid floods

Backed by a 50% government guarantee

Part of the reason the loans have a different set of terms is that the government guarantees 50% of the loan.

This contrasts with an earlier version in 2020, which had a 80% guarantee. It's best to check with your bank or lender about how your loan would be structured if you've already applied for a similar product but under the earlier scheme with the higher 80% guarantee.

The original scheme stopped taking applications at the end of December, but it was extended until June albeit with the lower guarantee.

Capped at 7.5%pa interest rate 

The government has also secured small business owners the pre-condition that no bank can offer more than 7.5%pa interest rate under this scheme. This means that loan applicants can get a better deal than comparable personal loans or commercial loans in the market.

A scan of the major banks - ANZ, Commonwealth Bank, NAB and Westpac - shows that interest rates offered are often less than half this capped rate. For example, NAB offers a 2.8%pa variable rate for secured loans depending on eligibility and 3.95%pa for unsecured loan up to $250,000.

Commonwealth Bank is worth including in your shortlist with its zero per cent interest offer on its Business Boost loan, but check all the fees and penalties that come with the contract. It is also only available until June.

Secured versus unsecured 

The rates vary depending on the amount you are looking to borrow and what security you can use against the loan. It's best to check with your lender, but in general the percentage difference can be as much as 1% or more depending on the asset.

Suncorp Bank, for example, offers a low 2.39%pa variable rate for secured loans, rising to 4.69%pa if unsecured. For unsecured loans, the maximum amount most lenders would approve is $250,000.

Repayment holidays

One of the biggest drawcards of this loan is the option to take a repayment holiday. Some banks offer six months while others can offer up to a year or two, depending on individual circumstances.

Under the government mandate, two years is the maximum period allowed to defer repayments. As all loans under this scheme are for a loan period of up to 10 years only, deferring payments for a couple of years means you will have eight years to pay the full amount (the loan, under its more favourable lower interest rate, cannot be extended beyond this amount).

The consequence of temporarily stopping your repayments include additional interest on top of your pre-negotiated interest. (For example, it could be a 0.3% additional interest if you ask for a repayment holiday).

Fees and waivers

Another reason small business owners should look into this loan before the June deadline is the lower servicing costs. You still have to cover any government-related fees or valuation fees if the loan is secured against commercial property, but there are generally no upfront or ongoing fees. 
Some lenders do charge establishment fees while others, if you want a redraw facility, charge a fixed amount (usually a few hundred dollars) every $5000 increment that you draw down from the loan.

Grant Cairns, executive general manager in business lending for Commonwealth Bank, says it offers financial assistance, on a case-by-case basis, for flood-affected businesses. This includes loan restructuring and merchant fee waivers.

"We understand each business is facing different challenges and opportunities at this time and encourage our customers to speak to us about how we can help meet their business needs," he said.

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Michelle Baltazar is editor-in-chief of Money magazine and an award-winning journalist, editor and publisher. She has worked at media companies including BRW, Shares Magazine (London) and industry newspaper Financial Standard, and has written about superannuation, wealth management, investment technology and financial advice.

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