radical times call for radical measures – a HECS-like loan system for small businesses


Small businesses in Australia have been much more affected by COVID-19 than larger businesses. Larger companies have larger secure balance sheets that allow them to raise capital or take on debt through more advantageous loan agreements. Many small businesses do not enjoy such benefits.

This is an important issue: capital is the fuel that drives innovation and small business growth. Without it, small business owners will be hampered in their efforts to deliver goods and services and grow in a post-COVID economy. Without capital assistance, many small businesses will not survive the current economic climate.

The SME guarantee scheme

Recognizing these facts, the federal government has introduced the Coronavirus Small Business Guarantee Program (SME Guarantee Program). From April 2020 to June 2021, the government will provide a 50% loan guarantee over three years worth up to $250,000 for small businesses with an initial repayment holiday of six months. This will fund up to $40 billion23 in loans. The government recently announced that the loan amount available will increase to $1 million from October 2020 and extend the repayment period to 5 years.

This program represents an unprecedented level of support for Australian small businesses. The government has acted with exceptional speed to support a critical sector of the economy that has suffered during COVID-19. The government’s responsiveness to the needs of small businesses is also exemplified by the JobKeeper scheme and recent changes to widen its availability in response to the lockdown in Victoria.

However, while the SME Guarantee Scheme was an unprecedented response to the current economic crisis, with good intentions at its heart, it has mostly failed in its aim of providing small businesses with access to flexible and flexible capital. at low interest rate. While $40 billion has been made available for this program, only $1.5 billion has been used. A combination of low business confidence, poor loan management by banks, and the underlying terms of the loans themselves – as discussed below – produced this failure.

Three reasons a HECS-style loan would be superior

In a recent report, the Blueprint Institute argued that a HECS-style income-contingent lending system would be a more effective method of capital assistance for the small business sector. There are three main reasons for this.

First, in these uncertain economic times, small businesses lack the confidence to take on debt in the traditional way. This is particularly the case in light of the COVID-19 outbreak in Victoria. Even if the SME Guarantee Scheme offered loans at lower interest rates over a longer repayment period, small businesses are unlikely to take out these loans at the level required to stimulate growth and investment in the whole economy.

This is illustrated by the example of the Bushfire Loan Scheme 2019. These loans were offered at exceptionally low interest rates with long repayment periods, but their take-up remained very low. Only 21,405 businesses out of the 600,000 eligible received a Bushfire loan or grant. One could argue that the low uptake of bushfire loans was the result of inadequate communication on the part of the government. However, since this low uptake has been reflected in the SME loan guarantee scheme, it is more likely that the underlying problem is that small businesses are unwilling to take out traditional loans in an uncertain operating environment.

Second, experts in the small business sector point out that banks are simply not well placed to administer the current SME loan guarantee. They note that banks have no experience in providing unsecured loans. In some cases, we have heard of banks requiring personal guarantees from business owners to access these loans. The government designed them not to be guaranteed; personal guarantees undermine the fundamental purpose of the plan. It is difficult to see how even a reformed SME loan guarantee system could overcome these problems – to succeed, the government would have to lead a structural change in the way large financial institutions interact with small businesses – both a cultural perspective and changing responsible lending requirements. This is unlikely to happen in the short term.

Finally, some may argue that we should reform the SME guarantee, rather than adopt a HECS-like lending system. Perhaps the government could guarantee more than 50% of the loan (for example, 75% of the total value) or work with the banks to reduce the interest rates offered to small businesses. While this would reduce the administrative burden and risk for the government, the change to the SME Guarantee Scheme is unlikely to solve structural problems within the program or adequately benefit small businesses.

It’s time to act

Through our research and engagement with the small business sector, the Blueprint Institute concluded that there was a need to further stimulate small business. With the government already committing significant funds to maintaining jobs in small businesses through JobKeeper, improving access to flexible capital arrangements is likely to improve the efficiency of this spending by saving viable businesses. and helping them grow. Changing the method of delivery to a HECS-like program will simply allow funding, which the government has already recognized the needs of the sector, to flow to small businesses.

Through a HECS-style loan, the Australian government can better deliver on one of the great promises of our liberal democracy – to reward entrepreneurship, hard work and aspiration. For small business owners with innovative ideas on how they can provide new goods and services in a post-COVID economy, a capital injection would be an opportunity to invest and grow their business with peace of mind. that the loan will only be repaid from future income. A HECS-style loan for small businesses could spur innovative activity and job creation, leading to higher levels of productive economic activity and accelerating the country’s economic recovery.


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