- Start with your cash flow forecast
- Maintain a consistent cash flow
- Government stimulus packages
- Changes to the business finance industry to support the flow of credit to SMEs
- Should I take advantage of these business finance incentives?
One of the biggest problems facing Australian businesses during the COVID-19 pandemic is cash flow. Early statistics from the Australian Bureau of Statistics found that only 11% of businesses reported an increase in demand for their products, with 4% actually recording an increase in turnover. Cash flow continues to dampen the economy with flow-on effects.
The Australian Government has introduced several measures designed specifically to support the flow of credit to the business. Stimulating cashflow will hopefully help companies stay in business and ride out what may perhaps be a long economic recovery.
Start with your cash flow forecast
As businesses turn to resources for cash generation and cash preservation, during contraction periods, we recommend to our clients that they first take the time to develop a cash flow forecast model. A cash flow forecast model provides your business with significant insight into the unbiased flow of cash – how the cash is allocated and where it is coming from.
Cash flow problems are not new for businesses, however, economic downturns are the pertinent reminder we need to go back to accounting basics.
A cash flow forecast is exactly this – cash is essential to any business, so by analysing exactly where the cash inflows and outflows come from, provides an accurate picture of your business’s financial health. It also gives you an understanding of the causes of your business’ health (whether positive or negative).
Your business may be operating a profitable venture, but you need to watch how much real income is flowing into your business as revenue from your regular operations. Cash flow has a big impact on your business’ future operations – a low cash flow can expose ongoing operations.
Maintain a consistent cash flow
Once your business has conducted a cash flow analysis it will be necessary to focus your attention on the areas where your business is leaking cash – whether this is following up on late invoice payments, keeping a check on expenses or ensuring you have savings or a line of credit to fill the gaps between income and revenue.
In March 2020, when the effects of coronavirus and shutdowns hit the economy hard, Australia saw a growth of 2.9% in Australian businesses seeking credit, the biggest single jump since January 1988. Economists suggested this jump was a reaction to the government’s decision to provide cash flow assistance to business and the deferral of repayments for affected businesses for up to 6 months.
Government stimulus packages
One of the first of many COVID-19 pandemic strategies introduced by the Federal and State Governments were centred around providing financial support to the business by boosting cash flow.
Securing business finance, especially unsecured loans, is hard for small to medium businesses. The government has provided a guarantee of 50 per cent to SME lenders to support new short-term unsecured loans to SMEs.
This is designed to give SME’s timely access to credit to help businesses ride the impact of the coronavirus, as well as, enhance lenders willingness and ability to provide credit.
Which businesses are eligible for the Coronavirus SME Guarantee Scheme?
- SMEs with a turnover of up to $50 million will be eligible to receive these loans.
- The Government will provide eligible lenders with a guarantee for loans with the following terms:
- The maximum total size of loans of $250,000 per borrower.
- The loans will be up to three years, with an initial six-month repayment holiday.
- The loans will be in the form of unsecured finance, meaning that borrowers will not have to provide an asset as security for the loan.
More information on the Coronavirus SME Guarantee Scheme can be found here.
Changes to the business finance industry to support the flow of credit to SMEs
The government has put in new measures to ensure it is easier and quicker for businesses to access credit so they can better manage the impacts of Coronavirus.
Easing some of the business finance challenges ensures Australian business can access cash when it is needed most to see them through the downturn. It also gives the finance industry some assurances and incentives to lend to business during this period.
- Temporary exemption from responsible lending obligations for lenders – to help SMEs get access to credit quickly and efficiently, a six-month exemption from responsible lending obligations for lenders providing credit to existing small business customers, including new credit, credit limit increases and credit variations and restructures.
- Reducing the cost of credit – The Reserve Bank of Australia will provide banks with a $90 billion funding at a fixed rate of 0.25%. It is designed to reduce the funding costs for banks with a flow-on effect of helping reduce interest rates for borrowers. The RBA is also offering additional low-cost funding to banks if they expand their business lending, especially in new loans to SMEs.
- The RBA is taking steps to target a 0.25 per cent yield on 3-year Australian Government Securities.
- Supporting smaller business finance lenders – The Government is providing the Australian Office of Financial Management (AOFM) with $15 billion to invest in structured finance markets used by smaller lenders. This program will assist smaller lenders, who will not benefit from the RBA’s term funding facility, to maintain access to funding and support competition in the lending market. This, in turn, will help keep mortgages and other borrowing costs for businesses low.
- Banks are ready to lend – the Australian Prudential Regulation Authority (APRA) has introduced temporary changes to its expectations of bank capital ratios. This will encourage banks to lend to businesses and take advantage of the new facility offered by the RBA.
Should I take advantage of these business finance incentives?
If well planned and chosen wisely, business finance can kick start start-ups, businesses seeking growth, or looking to refinance, as well as businesses experiencing changing market conditions or wanting to take advantage of opportunities.
If your business hasn’t been hit by the coronavirus downturn, these stimulus measures are available to your company to secure finance. This may be a great opportunity to grow and invest in your business, with easier to access and lower-cost business finance.
If your business has taken a severe financial hit, we recommend you consider your cash flow forecast (from above). Have a look at your projected revenue figures for the next month, 6 months, year and two years and beyond as best you can, to determine your businesses ability to repay the loan.
The challenge for most businesses in Australia at this time will be finding a way to manage operational cash flows and working capital in a period of falling revenues, fixed costs, and slower payments from customers.
The COVID19 pandemic has seen us all sail into uncharted territory. We’re here to help businesses adapt and meet these new challenges. Talk to the team at Penguin Management to discuss your options to find opportunities your business may not have considered. We are available here or call our office on 1300 319 870.
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