Now that the initial shock of Covid-19 has started to diminish, within our own industry of asset finance, the process of looking forward at the impact of covid-19 and to next steps has begun. I take a look at the impact of covid-19 on asset finance credit in the short term.
Government Support
The Australian Federal Government had moved swiftly in an attempt to sure up small businesses with various initiatives. The Coronavirus SME Guarantee Scheme was one example of this. It supported businesses by giving them access to quick working capital to help get them through the adverse cash flow impacts as a result of the Covid-19 pandemic.
Now I would be extremely interested to see some statistics on the take up of this initiative, however through our own experience, we have seen many small businesses reporting a severe drop in cash flow. The above stimulus package does inject $250k of cash into the business, but at what cost? Well financially speaking the repayment alone will be in the vicinity of $7,500 per month over a 3-year period.
Hardship Requests
We experienced a massive influx of hardship relief requests. Basically, numerous businesses reached out stating they had been impacted by Covid-19 and were requesting a payment deferral of either 3 to 6 months. There were several variations on the above but that tended to cover the vast majority.
As an intermediary, 3E sits in the middle between our clients and the ultimate funder. It is interesting to see how the different funders react to hardship requests and without naming names, it is fair to say some deal with things better than others. But in general terms, those that request hardship relief are typically granted it.
Looking Forward
Now that we do start to look forward, we need to again assess the impact of covid-19 and the cost of this. To start off, the vast majority of those that have requested the payment relief to date, their agreement has been extended by the equivalent period and their repayments will increase slightly once the relief period is over. Being in the asset finance industry, that means for a lot of our clients they are likely to be holding onto aging technology longer than they should, at a greater cost than they initially anticipated. If it means that enables them to keep people employed and keep their doors open, then that is a cost I would be prepared to pay.
Just because you can, does not mean you should.
However, there are those companies that have requested relief, not necessarily because they need it, but because they can.
Financial Institutions are now starting to react to this. The message has become clear over the last few weeks; If you are claiming hardship relief on one agreement, you may not be able to apply for additional credit. Whether you like it or not, new applicants must understand this.
Now finally, there are those businesses that have not been financially impacted by Covid-19 or that had the right strategies in place to deal with such a downturn. Their business strategies have remained pretty much on track with plans and as part of business as usual they are replacing obsolescent technology or investing for growth in new assets.
These businesses now face another round of questions as part of the application process. Covid-19 has impacted so many businesses cashflow that financiers now want assurances to support further lending. Whilst there are other factors, in the pre Covid-19 world a lot of lending/credit decisions focused on serviceability. In simple terms, ‘serviceability’ refers to the ability of a business to make repayments on a loan, according to the size of the loan and the businesses income and expenses. Nowadays there is an assumption that all business income has diminished. Lenders are therefore looking for re-assurance that the business will be in a position to make the repayments as part of all credit assessments.
So why do we share all of this?
As a business leader, you deserve transparency and you should know the facts. The credit world has evolved under Covid-19. Decisions made over the last couple of months could have long term impacts and returning to business as usual may end up being a little harder than we anticipated.
So it is important that you work with a trusted partner. A partner that will be transparent, a partner that will provide you the facts and work with you to simplify the process. One that can cater for multiple requirements and reduce the repetition of questions. A partner such as 3E Advantage perhaps. After all, it’s about the people.
Craig Birchall
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