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Under the SME Financing Guarantee Scheme, loans will be guaranteed by the Government of Hong Kong, reducing risks for lenders
With the spread of the global pandemic and worldwide lockdowns in place, companies have been experiencing extreme cash crunches and struggling to stay afloat. Small and medium-sized enterprises (SMEs) have been hit the worst, with small retail stores, restaurants, and other businesses experiencing a sharp decline in sales.
According to a survey of 350 SMEs and startups conducted in March 2020 by Phil Aldridge, who chairs the SME and Start-up Committee for The British Chamber of Commerce in Hong Kong, more than 24% of businesses are concerned about having to shut down their business while almost 15% are concerned about paying staff salaries at the end of the month. 12.5% of the respondents were also concerned about rent payment at the end of the month.
In order to alleviate the burden of paying wages and rent for SMEs suffering from reduced revenues, and thereby minimize layoffs and prevent enterprises from shutting down, Hong Kong’s Financial Secretary announced on February 26 that the Hong Kong Mortgage Corporation Insurance Limited (HKMCI) will introduce a Special 100% Loan Guarantee under the SME Financing Guarantee Scheme (SFGS).
Under this scheme, the loans will be 100% guaranteed by the government and therefore carries no risk to the lenders. The full list of participating lenders can be found here.
On April 8, 2020 the government increased the aggregate guarantee commitment from approximately US$2.6 billion (HK$20 billion) to a little over $6.4 billion (HK$50 billion).
The SFGS was first launched on January 1, 2011 by the Hong Kong Mortgage Corporation Limited (HKMC). Since May 1, 2018 the Scheme has been transferred to and carried on by the HKMCI, a wholly-owned subsidiary of the HKMC.
The objective was to help small and medium-sized enterprises (SMEs) and non-listed enterprises in Hong Kong obtain financing from participating institutional lenders to meet their business needs and increase productivity.
Under the scheme, the HKMCI provides loan guarantee coverage of 50%, 60%, 70%, 80%, and 90% to eligible enterprises approved by participating lenders, which includes commercial banks like HSBC, Standard Chartered Bank, and Bank of China among others.
At first glance, the name ‘100% SME Financing Loan Guarantee Scheme’ might be misleading and open to misinterpretation. It is important to understand that the scheme does not guarantee that all applicants will get a loan. Under the scheme, the government of Hong Kong acts as a guarantor to the lenders for the loans taken by SMEs who meet the eligibility criteria, in addition to the business owners who act as personal guarantors.
In other words, in the case that a business and its owners are unable to pay back the loans, the lenders can recover 100% of the loan amount from the government. This eliminates all risks for lenders providing the loans.
Here’s all you need to know about the scheme.
The loan guarantee is open to applications from SMEs in all sectors, including those most affected by the coronavirus outbreak such as retail outlets, travel agents, restaurants, cinemas, karaoke establishments, and transport operators. However, in order to be eligible for loans under the scheme, the applicant:
- Must be a registered company (defined as a sole proprietorship, partnership or unincorporated body of persons which has business operation in Hong Kong and remains registered under the Business Registration Ordinance (Chapter 310 of the Laws of Hong Kong));
- Should not be acting as a lender or providing funds for borrowing in any way;
- Should not be an affiliate of the lender;
- Should not be a listed company on The Stock Exchange of Hong Kong Limited (whether on its Main Board or the Growth Enterprise Market), or on any equivalent exchanges outside Hong Kong;
- Should have been operating for at least the three months before December 31, 2019;
- Should have suffered at least a 30% decline in sales turnover in any month since February 2020 compared with the monthly average of any quarter (i.e. January to March, April to June, July to September or October to December) in 2019;
- Should not have filed for bankruptcy and should have no outstanding loan defaults of more than 60 days.
The applicable interest rate for loans under this scheme would be 2.75% per annum, which is 2.5% less than the HKMC prime lending rate of 5.25%.
Although at the time of application, the effective annual interest rate will be 2.75%, it is important to note that thereafter, the annual interest rates may be adjusted in accordance with the adjustment of the prime lending rates of participating lenders.
Maximum Loan Amount
Businesses can borrow the total amount of rent and wages for six months, or approximately $500,000 (HK$4 million), whichever is lower.
If an enterprise does not have either employees or rented office space, the business is eligible to borrow [50% of the highest monthly net income in 2019 * 6]. For example, if a business’s highest monthly net income in 2019 was $1000, the enterprise can borrow a maximum of [$500 * 6 = $3000] under the 100% loan guarantee product.
SMEs with existing credit facilities guaranteed under the 80% or 90% Guarantee loans are also eligible for the special 100% loan guarantee. Multiple applications under the Special 100% Loan Guarantee from the same borrower should be submitted to the same lender.
Perhaps the most important question to consider for business owners who want to take out a loan under the 100% guarantee scheme, is whether they are ready to be be personal guarantors for the loan. Any individuals or groups of people who hold more than 70% of the issued share capital or equity interest of the borrowing company will have to enter into a legally binding guarantee holding them personally responsible for repayment in the event that the company is unable to do so.
This means that if you own an SME, either solely or jointly, and want to avail a loan under the 100% loan guarantee, you will have to sign a Personal Guarantee for the full amount of the loan.
For example, let’s say an SME is jointly owned by three people who are entitled to more than 70% of the shares of the business. Each shareholder will have to sign a personal guarantee for the entire loan amount under this scheme. Therefore, in case the business fails to pay back the loans, each owner may be held liable, and the lender may approach each owner to recover the full amount. Only when all owners of a company fail to pay back the loan will the lenders approach the government for repayment.
Because of this stipulation, it is extremely important for business owners to evaluate their business prospects in the future and consider their personal ability to repay the loan if push comes to shove. Business owners are already exposed to high risks, and should consult with professional advisors to correctly determine their business’ potential to pay back the loans.
Use of Proceeds
The 100% loan guarantee was launched with the objective of alleviating the burden of wages and rent on SMEs that have suffered a decline in business due to the global pandemic. Therefore, the loans can be used to pay rent and employee salaries, and to meet imminent working capital demands.
Proceeds from the loan under this scheme cannot be used for repaying, restructuring, or repackaging existing debts that the company owes.
The loan has to be repaid in installments within the maximum guarantee period or loan term of 36 months (3 years). To reduce the burden of immediate repayment, lenders may provide the option for a ‘principal moratorium’ for the first 12 months. This means that your business may be allowed to pay only interest in the initial 12 months after the loan’s start date. However, you will have to repay the principal with interest during the remainder of the loan’s tenure.
Application Period and Processing Time
Applications for the scheme are open for the 12 months starting April 20. Processing time is expected to be 10–14 working days from submission of the application to receipt of the funds, though this may vary depending on whether you are an existing customer of the lender or not.
According to the HKMC, loan applications are expected to be processed speedily since the government is acting as a 100% guarantor. Lenders may choose to focus on the quality of applicants rather than their ability to pay back the loans.
Under the 100% loan guarantee scheme, the annual guarantee fee has been waived by the HKMCI.
The basic documents required for loan applications under the 100% guarantee scheme are as follows:
- Business Registration Certificate
- Audited financial statements, management accounts or sale record to prove that the enterprise has suffered at least a 30% decline in sales turnover in any month since February 2020 compared with the monthly average of any quarter in 2019
- Stamped tenancy agreement or rental receipt, and supported by the latest available payment records such as bank pay-in slips
- Employer’s MPF mandatory contribution statements
Find the full list of documents required here.
The documents required may vary from lender to lender. Interested businesses can contact any selected lender for a comprehensive list of documents required for loan applications under this scheme.
For any queries regarding the scheme, HKMCI has set up a hotline for the scheme at +852 2536 0392, and can also be reached via email at [email protected].
Although a few businesses have expressed doubt about the length of the application process, and though the need for a personal guarantee may deter business owners from availing loans under this scheme, the 100% loan guarantee will likely extend a lifeline to numerous SMEs and startups struggling to survive under the present conditions.
Photo by Floriane Vita on Unsplash.