Events of March to April 2020
Recent measures put in place by the Federal Government have not been seen in Australian Society since the Great Depression. Social distancing and the total shutdown of bars, clubs, cafes and restaurants (to name a few) will invariably impose a huge economic cost on many small to medium businesses. This has come at time when businesses were already under pressure through a general slow down in the economy, through drought, bush fires and floods.
Not only are businesses worldwide about to feel the pinch, the Covid-19 impact is also being felt in both the share markets and money markets throughout the world. Over the last month or so, we have seen extreme volatility via the rapid sell off of shares and the tightening of lending restrictions in the finance sector.
The Covid-19 outbreak has forced the hand of governments throughout the world, to order their residents into self-isolation and thus significantly reduce the economic activity for countries on a global scale. This level of decision making would obviously be difficult for governments as they are considering preserving life and the spread of the disease whilst at the same time minimising the loss of businesses and employment.
What are the Federal and State Governments Doing to Help?
It appears that Scott Morrison and his Liberal colleagues have been quite proactive in their response to the Covid-19 crises and are announcing various programmes to help assist Australian businesses and employees of Australian businesses. These announcements by government are evolving on a day to day basis and seek co-operation from banks, state governments and the opposing sides of the parliament. Other governments throughout the world are also trying to assist their economies in an attempt to stave off a catastrophic global recession. To see what support packages are available for your business, please check out the ATO website for further details. In addition to the ATO website, please refer to the websites of your respective State Governments and have a conversation with your Accountant.
How will Covid-19 Impact on My Ability to Obtain Finance?
Banks and other lenders in Australia, borrow money from investors throughout the world in order to lend to their customers – for instance so their customers can purchase trucks and heavy equipment etc. During times of severe economic uncertainty, investors often impose tighter lending covenants. The current trend across the board is that investors are nervous about increasing default rates and are placing tighter lending restrictions on their customers. This unfortunately means that at present, it is currently a lot harder for truck drivers and heavy equipment operators to obtain truck finance or heavy equipment finance.
Going forward the big four banks in Australia need to adhere to the lending standards imposed by APRA and other statutory bodies along with complying with the tightening lending restrictions imposed by their investors. This means that funding for new start businesses is very hard and existing businesses need to tick off a few more boxes than ever before.
Low doc loans are becoming increasingly hard to obtain through lenders around the country with most applications requiring strong company financials (as prepared by a qualified accountant). These company financials must show capacity to service both company debts (current and proposed) and personal tax returns must show capacity to service personal debts of the directors.
In addition to still adhering to regulatory obligations, the big four banks are increasing requests for tax portals on customer integrated client accounts, to ensure there is no tax arrears and that GST and PAYG statements are up to date. At this stage of the game, it appears that many funders will decline finance applications if a customer has tax arrears or are currently under a payment arrangement with the ATO. However, there are still funders in the market that will consider providing finance to those with an acceptable ATO debt – if the debt is under a payment arrangement. Acceptable ATO debt will be handled on a case by case basis – with each tier two funder (private or non-bank) having varying policy guidelines.
With respect to equipment finance whereby the equipment is used as security (as opposed to property security) means that funders have tightened up on what equipment is being funded. Age of equipment, type of equipment and what the likely resale value of the goods would be in the secondary market are considerations of high importance at the minute. For instance, a 20-year-old food delivery truck would be considered a high-risk asset, particularly if it was to be repossessed and sent to auction. The expected buyers looking to bid on a 20-year-old truck would be extremely limited at the moment.
What Industries Seem to be Worst Affected by Tightening Lending Policy and Covid-19?
The following industries are currently experiencing a high degree of stress when it comes to securing suitable Equipment Finance Funding;
- Hospitality (coffee machines and shop fit outs)
- Fitness (gym and cardio equipment)
- Manufacturing (lathes and production lines)
- Wholesale trade (pallet racking, forklifts)
- Airlines (aircraft – passenger planes)
What Industries Seem to be Least Affected by Tightening Lending Policy and Covid-19?
The following industries are more likely to access Equipment Funding with respect to the purchase of Capital Equipment;
- Mining (strong demand for Australia’s natural resources)
- Transport (high demand for produce and consumables throughout Australia)
- Utilities (greater load on networks as larger portion of the work force operate from home)
Where to From Here?
Whilst the Covid-19 outbreak can be described as nothing short of disastrous, it is not all doom and gloom. Australia has a good strong banking sector in the form of CBA, Westpac, ANZ and NAB. There is also a diverse range of borrowing options to those that do not qualify for mainstream funding.
There are alternate funding solutions for truck loans outside of the major Australian Banks. These funders often come in the form of private funders or specialist Heavy Equipment Finance Companies. Please contact one of the Lending Consultants from Heavy Vehicle Finance to discuss what options are available to your individual circumstance.
Many financial institutions are also offering payment amnesty for up to six months – depending on what type of loan has been taken out.
Whilst still in the negotiation phase, the ATO and State governments appear to be acting in a proactive way – which means that banks, private funders and share markets will respond in a positive manner.
Some industries will be affected worse than others, however it is hoped that many businesses will survive Covid-19 and come out on the other side. If business can survive through innovation and assistance packages, payment defaults and repossession rates will kept at bay. This will in turn help protect the financial system in Australia – allowing greater access to capital for all businesses in the near future.
Australian businesses have a number of options available to them in order to get through the current economic conditions. These options come in both the form of Government assistance packages, payment amnesties and business loans – all subject to eligibility requirements. Whilst difficult times ahead, we wish all Australian businesses good fortune and a speedy economic recovery.