Sole proprietorships now explicitly included in R200b COVID-19 loan guarantee scheme

Finance Minister Tito Mboweni. Image credit: Twitter/National Treasury

The National Treasury has announced several changes to the government’s COVID-19 loan guarantee scheme, such as the inclusion of sole proprietorships and availability of business restart loans.

The scheme provides loans, substantially guaranteed by the government but with some of the risk shared by banks, to eligible businesses hit by the COVID-19 pandemic. It was started with a R100 billion guarantee with an option to extend to R200 billion if required.

Changes to COVID-19 loan guarantee scheme

In a statement on Sunday, Treasury said the changes are aimed at making it easier for businesses to access the loans. They include:

  • Business restart loans will now be available to help businesses that are able to begin operating as the economy opens up.
  • Bank credit assessments and loan approvals will be more discretionary and less restrictive.
  • Businesses can now access loans over a longer period. The draw down period has been extended from three months to a maximum of six months.
  • The interest and capital repayment holiday has been extended from three months to a maximum of six months after the final draw down.
  • The turnover cap has been replaced with a maximum loan amount of R100 million. Banks may also provide syndicated loans for loans larger than R50 million.
  • The test for good standing has been made easier. This has now moved back to 31 December, 2019 from 29 February, 2020.
  • Sole proprietorships are now explicitly included. For sole proprietorships and small companies, salary-like payments to the owners (drawings) are included in the use of proceeds. Security, suretyships or guarantees are not explicitly required.

Treasury also said the government is “exploring the option of working with non-bank lenders willing to share the risks of lending to their client companies in distress.”

In a separate explanatory note, Treasury added, “The loans are granted at a preferential rate (prime) and repayment may be deferred for a maximum of one year after taking out the loan.

“Businesses will then be required to repay the loan over five years. Banks are not permitted to profit from these loans and any surpluses generated will accrue to National Treasury.”

How COVID-19 loan guarantee scheme is structured

According to the National Treasury, the SA Reserve Bank will lend money to commercial banks at the repo rate (currently 3.50 percent) plus a 0.5 percent credit premium.

“Banks will lend this money to small and medium-sized businesses at the repo rate plus a fixed spread of 3.5 percent (currently 7.75 percent, equal to the prime lending rate).

“The banks are still prohibited from making profit from the scheme and the 3.5 percent margin will be used to provide funding for losses, before the banks incur losses and before the Treasury incurs losses,” it added.

Businesses in good standing with their banks at 31 December, 2019, registered with SA Revenue Service (SARS) and financially distressed as a result of COVID-19 and subsequent lockdowns qualify for the loans. They need to apply through their banks.

The following banks are currently participating in the scheme: Absa, Bidvest Bank, First National Bank (FirstRand), Grindrod Bank, Investec, Mercantile Bank, Nedbank, SASFIN Bank and Standard Bank.

Businesses which had their loan applications declined can now reapply under the amended scheme. “Businesses may contact their bank to apply for the revised deferral in terms of the amended loan guarantee scheme,” Treasury added.

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