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Risk Management: Details regarding the COVID-19 guaranteed loan scheme for SMME’s

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Risk Management: Details regarding the COVID-19 guaranteed loan scheme for SMME’s
12 May 2020
Act immediately and decisively in planning for the survival of your business – using effective disaster management tools needed to weather the storm.

During his state of the nation address on 21 April 2020, President Ramaphosa announced, as part of the current phase 2 of South Africa’s COVID-19 economic recovery plan, that as much as R200 billion will be made available by way of a guaranteed loan scheme, in order to assist small and medium sized businesses that are experiencing financial pressure as a result of the COVID-19 pandemic, the former strict nationwide lockdown and the current limited commercial and economic activities. This initiative is structured by way of a partnership between the major commercial banks, the South African Reserve Bank (“SARB”) and the National Treasury.

In essence, the scheme is structured on the basis that profits and losses are ultimately shared between government and the banks and aims to ensure that affected and eligible businesses can survive long enough in order to financially recover. Simply put, the loans extended by the commercial banks to these businesses will be backed by a government guarantee. The SARB therefore makes available the funds to the commercial banks via a special repo window and these banks then grant loans under the scheme to eligible businesses, in accordance with their own lending criteria.

In terms of the first phase of this scheme, R100 billion will be made available for new loans, by the commercial banks, to their existing clients. The banks are, however, not obliged to extend any loans and their normal risk evaluation and credit-application processes will apply to any business that applies for these loans.

The following criteria are applicable in order to qualify for these loans:

  • Only small and medium sized businesses with an annual turnover of less than R300 million will be eligible to apply.
  • All applicants must be in good standing with their banks as at 29 February 2020.
  • Applicants must be registered with the South African Revenue Services at the time of the application.
  • The capital borrowed by businesses in terms of these loans may be used to cover operational expenses, including salaries, rent and contracts with suppliers.
  • Each business may only accept one loan under this scheme. The banks will use the income tax number of applicants to verify if they have qualified for these loans at other banks. It is important to note that although each applicant may apply for one loan under this scheme, they are not disqualified from applying if they have obtained other loans or financial assistance from their banks or other institutions that do not fall under this scheme. The loan funds under this scheme may however not be used to discharge amounts owed in terms of other loan obligations or overdraft facilities.
  • The shareholders and/or directors of the business may be required to stand surety for the loan.
  • No dividends may be declared to the shareholders of the business, or any shareholder loans repaid for the duration of the loan period.
  • The business must have a clean record at the credit bureau at the time of the application.
  • Applicants must have been negatively impacted by the COVID-19 lockdown and the resultant slowdown in the economy.

The loans will be extended subject to the following conditions:

  • The loans will be offered at a standard lending rate (the prime lending rate applicable at the time of the application) agreed to by all the commercial banks participating in the scheme. 
  • A six-month repayment holiday will commence from the first drawdown on the loan. The interest will however start to accumulate on a compounded basis with effect from the date on which the first drawdown is advanced. It is noteworthy that the finance cost only commences accumulating from the first drawdown and not the date the loan was approved or the facility extended. It is also noteworthy that the first six months is simply a payment holiday, i.e. while the payment of interest is delayed, interest does accrue during this payment holiday period. 
  • Repayment of capital and interest will commence after the six-month payment holiday and successful applicants will have a maximum of sixty months (five years) to repay the full loan, capital and interest. It should also be noted that successful applicants may repay the loan ahead of schedule, without any penalties.
  • Businesses may only apply for a loan which is equal to three months of operational expenses, which will be advanced in three installments and not in a once-off lump sum.
  • The amount extended under the loan must be used to cover the operational expenses of the business for the subsequent three months and may not be used for expenses and costs incurred prior to the loan period. 
  • A monthly administration fee will be levied by the bank, but no application fee will be levied when the loan is applied for.

According to initial indications received from the major banks, the following documentation must be provided together with the application:

  • The 2019 annual financial statements of the business.
  • The most recent management statements.
  • The current cash flow report of the business.
  • List of the assets and liabilities of each director.
  • Proof of the relevant debtors and creditors of the business.
  • The normal FICA documents will be required by the bank in respect of the business making the application, in accordance with their risk management and compliance frameworks.
This new scheme will operate from 12 May 2020, as confirmed in a formal media statement from National Treasury, and is envisaged to assist over 700,000 businesses in staying afloat over the next few months. Should your businesses require financial assistance at this stage to support its operating costs, it is advisable that you contact your bank to discuss your options in applying for a loan.

For the moment and at date of publication, this is the information we have obtained. We will keep you updated should any further relevant information come to our attention.

Although we have used our best efforts to ensure that all information contained in this communication is accurate as at the date hereof, we cannot guarantee the accuracy thereof and recommend verification thereof before use.
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