The role of accountants in providing loan advice to SMEs

By Gary Anders

Many small and medium-sized enterprises (SMEs) are finding themselves under unprecedented strain, with many forced to defer loan payments and seek funding support while they grapple with severely diminished cash flows.

Australia’s accounting sector has been caught squarely in the middle of this crisis, as hundreds of thousands of businesses across the country have sought help to understand the various government and finance assistance measures available, and to prepare new loan applications.

CPA Australia has also been playing a central role in assisting members and, where possible, working to resolve roadblocks on behalf of members, including problems around businesses gaining access to finance needed for employee JobKeeper payments.

“The Australian banks have done a really good job in their communication to SMEs, loan deferrals are available, and there’s access to finance,” says Gavan Ord, manager, business and investment policy, at CPA Australia.

“But that’s obviously not the case in all situations, and we do hear stories from members around issues some of their clients are having.”

CPA Australia has directed many of these issues to the Australian Banking Association (ABA), as both organisations work together to identify and resolve funding challenges facing SMEs.

“We’re working with the ABA to identify issues in the system and are trying to address those, especially where members are directly affected, but more broadly as well,” Ord says.

Ana Marinkovic, customer executive, business direct and small business at National Australia Bank (NAB), says she has spoken to many customers throughout the COVID-19 pandemic, and has seen common themes evolving in the challenges that they face.

“This has been an unprecedented time for business owners and many have needed to actively focus on ways to both minimise expenses and carefully manage their cash flow, including changing ways of working and transitioning to online operating models,” she says.

“Another area of significant concern for small business owners is the uncertainty of future consumer behaviour following the easing of restrictions, and how quickly and confidently consumers start returning to previous spending habits."

Joe Formichella, head of small business for Bendigo Bank, Australia’s fifth-largest retail bank, says the role of accountants in assisting SMEs to access finance can’t be underestimated.

“Ideally, we want business customers to connect with their accountant very early on to let them know they’re looking to borrow money,” Formichella says.

“We would hope the business customer and the accountant would sit down and do a bit of a due diligence around the purpose of the loan, the business’s ability to service that loan and what additional time they’ll need to be able to repay the additional debt.”

In the current environment, most applications are around keeping a business funded and supplied until economic conditions improve.

Formichella says the most appropriate loan products for a business customer, whether bridging finance, a line of credit or for other borrowing needs, is discussed at the time the customer meets with their bank relationship manager.

 

"Ideally, we want business customers to connect with their accountant very early on to let them know they're looking to borrow money." 

 

“It’s important to come prepared with a business case and plan detailing the purpose. It needs to make sense for the business, and for any additional funding to deliver a net benefit to the business as well.”

Marinkovic says many small businesses will need ongoing support to bounce back from the impacts of the pandemic.

“With many businesses innovating and changing their operating models as a result of the pandemic, NAB recently launched the Small Business Hub to support SMEs in restarting, digitising and sustaining their businesses online.

“It’s a great way to support our customers embracing the new consumer buying behaviours we are seeing as a result of the pandemic.”

Formichella says a lender needs to ensure there is a viable business in place, which requires an understanding of the history of financial performance for the business to identify a trend.

Generally, this requires two to three years of historical financial performance, including the business’s balance sheet, profit and loss and cash flow statements. New applications also require more up-to-date financials to ensure the performance trend has continued.

“That gives us a good idea of the ability of the customer to continue to generate a level of financial performance to support existing debt or additional debt. It also gives us an idea of the quality of management and their performance – what decisions they have made to continue to improve their business and returns,” he says.

“Then we’re looking for at least 12 months of projections on what the future state of the business looks like to ensure that additional debt can be serviced as well, over and above all of their existing commitments.

 

"We need clients to demonstrate the loan will be for business purposes and be used to support current and upcoming working capital needs." 

 

“We do take all of those factors into consideration, and there also has to be a level of compassion and a genuine need to support our customers through this cycle.”

Andy Kerr, executive general manager – business customer solutions at NAB, adds: “We need clients to demonstrate the loan will be for business purposes and be used to support current and upcoming working capital needs.

“For example, will it be used for short-term operating expenses such as rent, wages and stock? It’s important to discuss and understand your client’s business’s cash flow needs before making a decision on which loan to proceed with,” Kerr says.

Looming cash flow crunch?

Formichella says Bendigo Bank conducted an intensive business customer calling program throughout March to try to understand the impact of the pandemic on their operations.

About 30 per cent of its SME customers selected elected to defer loan repayments by up to six months.

“There is quite a bit of frustration and stress that’s out there at the moment. It’s quite stressful for small businesses, the fact that the impact on their business is not of their own doing.”

Ord says the spike in loan and tax payment deferrals by businesses, together with the surge in finance applications to fund JobKeeper payments, does present a looming problem.

Most assistance measures are only in place until the end of September.

“Are we setting ourselves up for a potential cash flow crunch in late September? And how are the banks and governments going to think about that, and possibly mitigate the risks of that cash flow crunch for business?”

Ord says businesses will need to factor in whether they’ll be able to meet all their cash flow requirements, including deferred loan payments, come late September.