// In an exclusive article written for Startup News, finance expert Michael Coombes discusses the situation for startup lending amid the COVID-19 pandemic.
It is impossible to discuss business finance in 2020 without mentioning COVID-19. This world-wide pandemic has changed the landscape of business finance forever, including for startups.
We find ourselves at the early stages of this pandemic and whilst recent events indicate that the medical emergency may be subsiding, the financial ramifications are only just starting to emerge.
The reaction of lenders to the financial impact of COVID-19 can be described in 3 stages:
- Short term (0 – 4 months) – lenders are totally absorbed in handling the enormous workload created by the economic fallout of COVID-19. In addition to the challenges of working remotely, many bank staff have been seconded to newly formed COVID-19 teams , dealing with assisting clients to defer loan repayments and establish new working capital facilities. In addition, the banks are trying to model what the possible outcomes will be, in terms of bad and doubtful debts and a declining economy. As a result, appetite for new lending will be subdued.
- Medium term (5 – 11 months) – after a combination of an easing of restrictions, and a reduction in the number of clients requiring urgent assistance, the banks will return to some level of ‘normalcy’ and be able to more clearly identify the businesses that will survive COVID-19 and those that won’t. As the air clears, they will carefully re-enter the market and start to increase lending.
- Long Term ( 12 months +) – This should provide sufficient opportunity for clear signs to emerge as to how quickly the economy has recovered. Lenders will be keen to lend, being that is their fundamental business, but they will be selective in the deals that they back, seeking applicants that have proven managements skills, a sound business strategy and strong capacity to service the loans. Any business that has thrived during COVID-19, let alone those that survived, will be keenly sought after by the lenders.
Will startups qualify for funding?
Funding for startups will prove to be challenging during this period, but not impossible. Applicants will need to be prepared to plan, implement and adapt.
The Government Stimulus Packages may be of some value for some startups, and has been discussed elsewhere. As with many government initiatives however, you do need to get into the fine print before you can see who may or may not be covered.
The Coronavirus Government Guaranteed loan facility is a case in point.
There are various criteria, but a key one is that you have to be able to prove that the business can demonstrate a capacity to service all its debts, including the proposed facility, on its trading performance prior to COVID-19. This will make it hard for many businesses to qualify, particularly startups.
The next year or so will be a particularly challenging times for startups. Not only has the financial services industry landscape changed significantly, but our society and economy will change forever.
There is risk as well as opportunity going forward. This is the time to reconsider your business plan. Is your product or service going to be relevant in a post COVID-19 world? Will your business be agile enough to survive a similar event? Do you have an over reliance on certain suppliers and / or customers? What can you do to protect yourself from events outside your control?
Expect that lenders will require you to provide a ‘Pandemic Survival Plan’ as part of any request for business funding.
“The biggest challenge going forward will be to find the balance of preparing and planning for the unknown, without stifling the creativity, passion and energy required for a startup.”
What bank assistance is available for relief on my current business loan?
There are multiple incentives being rolled out currently, including deferment of repayments, unsecured business loans and short term Job Keeper loans.
Follow the links below to the various business loan pages of your major bank to see their latest offerings…
Some final advice
A critical issue for you to consider is that the banks have stated that if a borrower elects to take up the option to defer repayments, any funds sitting in ‘redraw/available funds’ will be frozen. Please make the necessary adjustments prior to requesting a deferment of payments.
Serious consideration needs to be given to the decision whether or not to defer loan repayments. Interest will continue to accrue and be capitalised into the loan. This means it will eventually cost you more if you defer payments.
Should you continue to make standard repayments, a partial payment or should you take the deferred payment option and build your cash reserves? This is ultimately a personal decision for each and every one of us but the old adage ‘cash is king’ may never be truer than today.
Article written exclusively for Startup News, published with permission.
About the Author
Michael Coombes is Director of Southshore Finance. Mike has 40 years’ finance industry experience including 33 years as a finance broker. Mike is a specialist in business acquisition and expansion finance, providing working capital solutions and facilitating commercial property finance, including SMSF borrowers.
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