How to inject funds into your small business to survive Covid-19
The R200 billion Covid-19 loan scheme is the outcome of the South African Reserve Bank (SARB) and the National Treasury partnering with members of the Banking Association South Africa (BASA) to help small and medium enterprises, support the economy and save jobs.
The scheme will allow qualifying businesses to apply for loan funding from their primary bank for three months of operational costs, such as salaries, rent and supplier payments. All loans will be subject to bank credit approvals.
The Covid-19 loan scheme is a special credit facility that is being disbursed on behalf of SARB and National Treasury, using the infrastructure of the banking industry.
Risk-sharing mechanisms in the scheme balance the need for government to support qualifying businesses, with ensuring the continued safety and soundness of the banking system. Similar schemes have been rolled out in over 50 countries in recent weeks.
Funding for these Covid-19 loans will be provided to banks by the SARB through a special financing mechanism. Any losses on the loans will first be offset against any margins earned on a bank’s portfolio of Covid-19 loans. Losses thereafter will be offset against a guarantee fee payable to the National Treasury by banks.
Any further losses thereafter will be shared, with the first six percent being absorbed by the banks and the net balance absorbed by the National Treasury. Each bank will sign a bilateral agreement with the SARB, covering their participation in the scheme. The SARB will in turn contract with the National Treasury.
The scheme – which will start with an initial R100 billion - will be launched as soon as all the necessary legal agreements are in place. All parties are working around the clock to implement the scheme as quickly as possible after these agreements are finalised. While the finer details of the Covid-19 loan scheme and the related application process are still being finalised, the following principles will apply:
• The Covid-19 loan scheme is a commercial arrangement and requires a credit application process, through which banks must evaluate if the business will likely be able to service all its commitments after the pandemic and lockdown. Banks are not obliged to extend Covid- 19 loans and business owners may be required to sign surety.
• The size of the Covid-19 loan will be calculated on the three-month funding requirement of certain operating expenses of the business, as approved by the bank, to be disbursed in monthly tranches.
• Banks will not profit from the provision of the SARB guarantee. However, the administrative cost of facilitating the loans and the cost of capital will be recovered.
• In the event of default, the Covid-19 loan would be subordinated to all other creditor claims.
• The repayment of shareholder loans or dividends, using these funds, is expressly prohibited.
To qualify for the standardised Covid-19 loan, businesses, including sole proprietors, must inter alia:
• Have a turnover under R300 million per annum
• Be in good standing with their bank, prior to the onset of the Covid-19 pandemic
• Be registered with the tax authority
• Have insufficient normal borrowing capacity to fully fund its monthly operating expenses
• Be adversely impacted by the lockdown.
Companies that may qualify for a Covid-19 loan, are advised to contact their primary bank. The launch date of the scheme and further details are expected to be announced shortly.
During the initial phases of the scheme, some processing backlogs will be inevitable. Banks undertake to work though these as quickly as possible and ask clients to be understanding of the challenges our staff have operating in the lockdown.
The R800 billion economic relief and stimulus package announced by President Cyril Ramaphosa and the Minister of Finance, Tito Mboweni, is an urgent and necessary part of saving lives and livelihoods, as the country unites to curb the pandemic. It will do much to alleviate poverty, hunger and uncertainty in our communities.
As important as they are, these emergency measures are not a sustainable solution to the devastating social and economic damage caused by the pandemic. We call on the President to urgently implement the ‘third phase’ of his economic recovery strategy: infrastructure development, structural reforms and sustainable transformation, to kickstart inclusive economic growth, create jobs and boost consumer and investor confidence.
We need to rebuild a new and better economy for all South Africans. We hope these measures will be reflected in the extraordinary budget, which is yet to be announced. It is essential for both lives and livelihoods that we safely and fully reopen the economy as soon as possible.