Australian organisations who have received support from their bank during the COVID-19 pandemic now have limited time to finalise new long-term arrangements.
Some organisations were granted some ‘breathing space’ from their bank, with their loan repayments being deferred since lockdowns began in March. Others, who were able to pay something, switched to interest-only repayments during this time. While some of these arrangements have continued in the short-term, typically the deferrals were only temporary.
Could you comfortably ‘switch back’ to meeting your regular loan repayments?
If you are fortunate enough to have kept or regained a reasonable level of income during the pandemic, clicking back into regular loan repayments may not be an issue.
For others, it could be more of a challenge. As reported in the media recently, as many as 20% to 30% of impacted bank customers are still on some form of deferral or reduced payments. Many organisations have had their repayments start again, but they are now facing the end of government assistance, including JobKeeper and Australian Taxation Office (ATO) support, or rental deferrals. This means their ability to meet future loan commitments may be uncertain.
Constantly changing rules
The Australian Prudential Regulation Authority (APRA), which regulates banks in Australia, released new rules in September. These rules outline how banks must manage small-to-medium-sized business customers (those with less than $10 million in debt) who have been impacted by the COVID-19 pandemic. In these situations, banks and their borrowers have a limited amount of time to establish new long-term loan arrangements.
The banks have been put on notice - arrangements with their borrowers must be agreed and new loan agreements signed before 31 March 2021.
If your business has received temporary support from a bank because of COVID-19, the bank is currently able to restructure your loan in almost any way, including:
- Extending your loan repayment date, even if it makes the loan longer than the original loan term
- Reducing or delaying your repayments
- Reducing your interest rate
- Waiving or capitalising interest that otherwise would be payable.
From April 2021 the rules will change again. If your bank offers the same degree of support (as the options above), APRA will force them to classify your loan as impaired or problematic.
From this date, banks must deal with COVID-19 impacted business borrowers just like any other borrower who falls into arrears or cannot repay their loan. Traditionally, bank shareholders become demanding when any significant increases in impaired loans start to impact their dividends. They want to get tough on problem loans and find ways to get the money back – and that can only lead to difficulties on all sides.
What does this mean for borrowers?
We cannot see how banks will be able to provide the same level of flexibility and support when their shareholders expect them to chase up customers who are not making repayments.
We recommend getting in front of your bank now to negotiate loan terms reflecting the new economic realities with manageable repayments while you still have time. You will need some lead time, because your bank needs to go through a regular approval process and get new loan agreements prepared, all before the end of March 2021.
To have a bank consider a new long-term arrangement, you will need to include the following documents:
- A business plan
- A cashflow forecast
- Financial accounts to 30 June 2020, prepared by an accountant
- Management accounts to the end of September 2020
- Clear details of what your position is with the ATO/landlord/creditors and other relevant stakeholders
- A proposal outlining what you can pay and by when.
If you require further information or assistance with bank discussions, please contact the BDO Debt Advisory team.