High on the agenda of Finance Minister Tito Mboweni’s supplementary budget speech on Wednesday 24 June was the need to support the economy as it gradually reopens as well as to get businesses moving again.
Notably, Mboweni announced amendments to the COVID-19 guaranteed loan scheme that was introduced at the beginning of lockdown, offering some relief to struggling businesses.
The scheme was created as a joint effort by the President, the National Treasury, the South African Reserve Bank and commercial banks.
Profits and losses shared between Government and banks
The scheme is now operational and participating banks so far include Absa, FNB, Investec, Mercantile Bank, Nedbank, and Standard Bank, with around R10 billion already lent.
The scheme will work on the principle that profits and losses are shared between Government and the banks and ultimately aims to make R200 billion available for new loans to existing customers, with the initial phase amounting to R100 billion.
Notably, this scheme was originally limited to small, medium and micro enterprises with an annual turnover of less than R300 million. As Mboweni announced in his supplementary budget speech, a ‘business restart option’ is to be put into place and the cap on turnover is to be removed.
The scheme is currently being rolled out by banks, and distressed businesses that are interested in applying for this relief should contact their banks for further details.
Important features to note in qualifying for this assistance are as follows:
- The loans will be available from banks to businesses that are in good standing with their commercial banks, registered with SARS, and have exhausted their capacity to obtain funding or find themselves in financial distress due to the pandemic and the lockdown.
- Whilst originally requiring an annual turnover of less than R300 million, this cap is expected to be lifted.
- Funds borrowed through this scheme can be used for operational expenses (salaries, rent and lease agreements, contracts with suppliers, and so on), will cover up to three months of such expenses and can be drawn each month.
- It is not mandatory that banks extend these loans and normal risk-evaluation and credit application processes will still need to be applied, thus a business owner may be required to sign surety.
- Each business may only accept one COVID-19 loan.
- Loans will be offered at a single, agreed lending rate by all banks that participate in this scheme and the rate will track the repo rate (currently at 3.75%).
- As it stands, a six-month payment holiday will run from the first drawdown on the loan, but interest will also begin to accumulate from that date. Mboweni also mentioned that there will be a revision of the repayment holiday provision as well as a relaxing of the terms and conditions, in order to support lending.
- Repayment of capital and interest starts after this six-month payment holiday and businesses will be given 60 months to do so. Repayment can of course be done ahead of schedule.
Signing a personal suretyship may be problematic
It is clear that distressed businesses will need support in order to mitigate further damage to the economy and it is important for businesses qualifying for these economic relief provisions to make full use of all that is available to them to aid in this mitigation effort and to aid in the reopening of the economy.
We must caution that the banks may require that individuals sign a personal suretyship, which may well be problematic and a very difficult personal decision to be made under pressure as personal suretyships should generally be avoided where possible.
As the outcome of the pandemic is unknown, signing a personal suretyship may subsequently lead to personal financial ruin as the commercial banks will be entitled to follow their rights to recover what they can in the aftermath.
The principle of loan assistance from commercial banks is sound, but the personal consequences may be ruinous. There may be other options available and in these trying times it is paramount that sound business restructuring advice is obtained prior to taking any action.
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