Judo Bank co-founder and CEO Joseph Healy is lobbying the Federal Government to advance the case for a new financial scheme to help small businesses ride out the impact of the Covid-19 economic crisis.
Judo has been circulating a discussion paper among key ministers of the Morrison Government, including Treasurer Josh Frydenberg and small business minister Michaelia Cash, which stumps up policy options for dealing with the mounting debt challenges of Australian small businesses.
It includes a proposal to establish a new investment scheme where governments and private sector institutions invest in special debt instruments to replenish the capital resources of SMEs as they try to rebuild their businesses.
Healy argues in the paper that the pandemic is contributing to a “debt overhang” as more businesses take up opportunities to defer payments on existing loans and rents on leased properties.
He warns the government that a swift recovery is unlikely because payment deferrals and new loans sourced through the government’s SME loan scheme mostly add nothing to new productive capacity of the Australian economy.
Judo estimates that around A$25 billion has been added to the debt obligations of small businesses as a result of the pandemic.
“The post Covid world will see an unhelpful triangulation of higher debt, lower profits and reduced investment,” Healy told Banking Day.
“There is no magic wand to solve this problem, but ignoring it carries a great cost.”
A proliferation of ‘zombie’ firms could result if the problem is left only to market forces, with firms mostly focused on servicing debt instead of growing sales.
“Unless we find a solution we are going to have a lot of zombie businesses,” said Healy.
Judo’s discussion paper argues that government-backed support could take the form of a public private equity vehicle in which investors are repaid their principal and crystallise a return as soon as affected small businesses achieve performance benchmarks.
The proposed scheme could issue convertible notes that a business owner could repurchase when business activity recovers at any time in the next three years.
Equally, the government might be given an option to call back the instrument when broad economic indicators stabilize at improved levels.
“We need a solution to get SMEs back to acceptable debt levels, minimize the deadweight of ‘zombie firms’ and to help avoid damaging the future borrowing prospects of entrepreneurs through damaged credit data,” Healy said.
“There are a few options to solving this problem, but the most pragmatic and executable is to convert some portion of the unproductive debt to a private-public sector Covid equity vehicle, so providing inherently viable SMEs access to equity capital.”
Healy insists that the burden on taxpayers would only be temporary and that the social benefits were likely to be immediately apparent if small businesses were resourced to grow their way out of the downturn.
Underpinning the proposal is Judo Bank’s thesis that the economic recovery will be much slower than indicated by the Morrison Government’s initial policy settings announced in March and April.
“I think it’s highly optimistic to expect a V-shaped recovery,” he said.
Another observation driving Healy’s proposal is that the four major banks would keep access to credit open to fewer SME borrowers as debt servicing pressures intensify over the next 12 months.
Healy said the scheme would have to be carefully designed to ensure the government only provided capital support to relieve the new debt servicing burdens of firms that were attributable to Covid-19.
Firms would also have to demonstrate that they were “inherently viable” and able to rebuild within three years.