Skip navigation

Kickstarting the engine - short-term support for Australia's Small Businesses

August 19, 2020

Small businesses are the bedrock of the Australian economy, but they are suffering disproportionally through the COVID-19 crisis. With limited cash reserves and limited access to capital relative to larger businesses, many small businesses have been riding out the times of lockdown and uncertainty by relying on government support, tax holidays (e.g. federal income tax), concessions handed down by state and territory governments, and the limited personal reserves of SME owners. This situation is exacerbated in Victoria, where the introduction of Stage 4 lockdowns is presenting a significant challenge.

While the Australian Government has extended the JobKeeper program to March 2021, and revised eligibility criteria for businesses and employees as recently as last week, this payment support — a lifeline for businesses and sole traders — will eventually be phased out. The provisions policymakers put in place now to ensure that businesses can survive on their own will be critical for the vibrancy and future strength of the Australian economy.

Some avid free marketeers may argue that we should let these businesses fail. But a pandemic doesn't give you creative destruction—it destroys otherwise-viable businesses that would have been just fine with adequate access to insurance and capital. And business disruption due to COVID-19 is on an unprecedented scale. A ‘laissez-faire’ attitude would likely result in a devastating loss of businesses and firm-specific human capital that would set back the Australian economy for years to come. The links between businesses and their workers, as well as suppliers and customers, are valuable; a loss of a business reverberates through the local economy. On a large scale, it could be cataclysmic.

Many otherwise-viable small businesses are suffering not due to poor business practice, but because of legally mandated lockdowns and the economic uncertainty wrought by COVID-19. There was no escaping this economic fallout—the majority of countries that did less to contain the virus than Australia had much larger economic contractions. But having done their part to help halt the contagion, the small businesses affected deserve the support of policymakers.

At Blueprint Institute, we are deeply concerned that governments will miss vital opportunities to ensure the survival of Australia’s vibrant small business community. What can governments do to ensure a soft landing? A lot, we believe. 

This Blueprint seeks to enrich the public discussion by making policy recommendations that are practical and economically sound. We outline three problems currently confronting small businesses — access to capital, insolvency, and skill shortages— and proposes innovative and timely solutions to these problems within three key recommendations:

Recommendation 1: Capital on tap New HECS-style loans for small businesses

Publicly-funded loans for private enterprise may seem like a radical idea, but we are living in unprecedented economic times. Capital is the fuel that drives innovation in small businesses. Without it, small business owners will be hampered in their efforts to provide goods and services in a post-COVID economy. Without capital assistance, many small businesses will not survive the lockdowns.

At Blueprint Institute, we believe urgent government action is needed to provide small businesses with fast and unbureaucratic access to capital. We recommend introducing HECS-style loans to achieve this goal. These would offer small businesses certainty and peace of mind because repayments would be contingent on future revenue.  

We recommend:

A new small business HECS-style loan system

  • Blueprint Institute recommends that the Federal Government provide time-limited, revenue-contingent small business loans as part of support for the sector.
  • A HECS-style loan system for small businesses would drive much-needed business investment and job creation. It should thus be considered separately from the JobKeeper program in stimulus discussions.
  • Loan arrangements could be available until the end of 2021, at which point the program should be assessed for its uptake, repayment levels, effect on business investment, and its broader economic return.
  • These subsidised loans would be repayable from future revenues — the loans are subsidised in the sense that they offer businesses a zero real interest rate, which may equate to a saving of 3-4% of the loan value per year until it is paid off. Indexation would be added each year in line with increases to the consumer price index to maintain the true value of the loan.
  • A HECS loan system would represent a defensive investment that could decrease overall government spending during the period of virus prevalence and economic recovery. This system may reduce the cost and burden of other schemes (such as JobSeeker) as viable businesses would be provided with the capital they need to lead the economic recovery and support jobs. 

End the Coronavirus SME Guarantee Scheme

  • The new HECS-style loan program should replace the Coronavirus SME Guarantee Scheme. While we support the Government’s commitment to helping small businesses, the existing program has been largely ineffective in driving capital to the sector.
  • Funding for the $20 billion Coronavirus SME Guarantee Scheme should be redirected to this new small business loan program. This means that putting this recommendation into practice would not require new spending commitments from the Government.

Financial health checks for small businesses

  • Loans should only be available to viable small businesses to avoid wasteful spending and reduce exposure for taxpayers. The Government should engage licensed private practitioners to assess, via financial health checks, whether the business was financially viable prior to COVID-19. Small businesses that pass a financial health check would be eligible for the new loans. 
  • Financial health checks could be funded through a voucher system, paid by the taxpayer and administered by the ATO, with proceeds going to a trusted small business advisor (accountant, bookkeeper or other registered professional) who understands the business in question. Successful applicants could have the cost of the financial health check added to their loan amount to minimise cost to taxpayers. Additional conditions could be applied to reduce risk to taxpayer funds — for example, loans might only be available to businesses that have lodged 2 years of tax returns.

  • Extensive public education campaigns should be conducted to inform small business owners about the HECS-style loan program.

Cost: $20 billion has already been allocated for the SME Guarantee Scheme, so this should simply be repurposed for a HECS-style scheme. There may be some additional costs to the budget from loan defaults given the higher uptake of HECS-style revenue-contingent loans and the fact that the Government is funding the entire loan amount, not 50% of the loan (as with the SME Guarantee Scheme). 

While it is too early to say what default rates may be for the SME Loan Guarantee, let us conservatively assume a 100% repayment rate for these loans. If an 80% repayment target is set for the HECS-style revenue-contingent loans (the same repayment rate as existing HECS loans), this would represent a cost of $3.85 billion to the Government in loan defaults

During our consultation process, leading economists noted that default rates are actually likely to be lower with revenue-contingent loans than traditional bank loans, as repayments are only dependent on a business remaining viable and receiving revenue at some point in the future. Default rates will be lowered further due to financial health checks determining businesses’ viability prior to loan approval. In contrast, a typical bank loan requires businesses to service ongoing interest payments regardless of revenue, thus adding pressure to already strained balance sheets. When considering the cost, we must also consider the counterfactual to this scheme: less businesses surviving post COVID-19.

Recommendation 2: New ‘Insolvency Checkpoint’ program for small businesses

Business insolvencies are at record lows, suggesting a large number of ‘zombie’ companies are currently being propped up by JobKeeper. As JobKeeper payments are gradually rolled back, small businesses must have the ability to restructure their operations in an orderly manner. 

The financial health check, discussed above, will provide high quality financial advice to small businesses who are in trouble — small business owners who complete the check would be well-positioned to restructure or liquidate their business. However, to provide adequate time for these processes to run their course, COVID Safe Harbour measures should be extended to the end of March 2021. In addition, Blueprint Institute urges the Government to establish an education campaign to inform small businesses and sole traders on the brink of insolvency of both their legal rights under COVID Safe Harbour and the availability of the financial health check. Such an ‘Insolvency Checkpoint’ program would take some immediate pressure off businesses that are facing hardship but have good prospects of recovering from the crisis. It would also give small businesses more time to consider the most effective method of repaying creditors to free up capital for investment and job creation.

We recommend:

Extend COVID ‘Safe Harbour’ provisions

  • Introduced in March 2020, COVID Safe Harbour measures provide protection from liability, for directors of small businesses and sole traders, for insolvent trading that occurs in the ordinary course of business — until the end of September 2020. At the same time, it increased the minimum debt that can form the basis of statutory action ($20,000 from $2,000), and the time in which companies must pay that debt (from 21 days to 6 months), providing breathing room for small businesses to deal with financial issues without facing winding up proceedings. To ensure the efficacy of the proposed insolvency program, the Government should extend COVID-19 Safe Harbour mechanisms until March 2021, for those businesses that complete a financial health check, in line with the extension to JobKeeper. 

Offer taxpayer-funded vouchers for financial health checks 

  • As part of the financial health checks mentioned above, small business owners should be provided with clear information as to their options, whether their business is viable, and if so, which strategy will offer them the best chance to survive and thrive. 
  • These financial health checks should be delivered by a business' existing trusted advisor, such as an accountant, tax agent or bookkeeper. In this way, the financial health checks can be delivered in a timely manner, and also act as a safeguard against poor advice from non-qualified and/or exploitative actors. 
  • Cost: the cost of providing financial health check vouchers to small businesses (assuming 66% uptake) would be $4.4 billion; while this represents a significant investment for the Federal Government, it is a reasonably small amount in the context of overall stimulus spending. Further, it is likely to drastically increase the efficacy of the Government’s other policies targeted at saving jobs by strengthening the viability of small businesses through provision of high quality advice and planning for restructuring. This covers the cost of financial health checks relevant to recommendations 1 and 2.

Recommendation 3: Fast-tracking skilled migration - open the border for small business to recruit global talent

At the end of 2019, over 50% of small businesses said that availability of suitable labour was limiting their output; these shortages will likely increase as the continued restrictions on foreign arrivals and a lack of visa extensions limit the capacity of small businesses to access skilled labour. 

Blueprint Institute urges the Government to promote a skilled migration and visa pathway for small businesses, even as borders remain closed due to the pandemic. This would require a tiered system that streamlines applications and burdens small business owners with lower costs than large businesses when recruiting skilled foreign workers. The skill needs of the small business sector should be prioritised in any scheme to drive innovative activity, both because they are disproportionately affected by the lockdowns and because they are the primary drivers of innovation in our economy.

We recommend:

Streamlining visa approvals for those already in Australia

  • For migrant workers who are already in Australia, the Government should prioritise approvals for visa renewals where small businesses wish to employ workers.

Skilled migration targets and fee waivers for small business

  • To meet the skill needs of small businesses and ensure the labour market functions smoothly, the Government should set a target for temporary and permanent skilled migration that encourages workers with skills in critical areas (such as medical services, engineering, construction, technology, advanced manufacturing and cybersecurity) to enter the country, even when borders are closed. 
  • As an additional incentive to draw foreign talent into Australia’s small business sector, the Government could consider reducing or waiving expensive fees for visa applications and hotel quarantine. 
  • Cost: the exact cost of this program depends on the exact arrangement the Government settles upon, and whether costs are passed to businesses or taxpayers. The contribution of highly-skilled migrants in economic output and taxation is likely to dwarf even a generous approach to this program. Migrants to Australia contribute far more in taxes than they receive in welfare, and even during the current economic turmoil and recovery, this is likely to remain true. 


The Australian public is in favour of the Government supporting small businesses

Blueprint Institute believes that support for small business is a question of values, and that most Australians value fairness and the role of aspiration in our economy. Our recent polling supports this view.  

83 per cent of Australians support innovative policy which helps to level the playing field between small and large businesses to make it easier for small businesses to thrive.  

Australians also feel for small businesses and want them supported through this crisis. In response to the current economic crisis, 63 per cent of Australians said they would shop local to support small businesses, compared to just eight per cent who said they would shop at large businesses. 

Definition of ‘Small Business’

There are a number of definitions for small business in Australia. In recent years, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), the Australian Taxation Office (ATO) and the Australian Bureau of Statistics have used different definitions of small business. The ASBFEO prefers to use the same definition as the ATO: that a small business is one that has less than AUD$10 million turnover. This is the basis of our definition of small business, and it applies to 98% of Australian businesses. 

A huge proportion of these are very small — 95% of Australian businesses are very small (those with a turnover between $75,000 and $2 million) or micro (those with a turnover of under $75,000) in size. Another approach defines small businesses as those that employ less than 20 people; under this definition, 98% of Australian small businesses are ‘small’. Occasionally, we will use these more conservative definitions of ‘small businesses’ in this Blueprint paper in order to incorporate the widest amount of available data and statistics. Whenever we do so, we clearly note it in the text. Otherwise, all references to small businesses refer to the definition of a company with less than $10m in turnover.

Small businesses are the powerhouse of Australia’s economy. Those with less than 20 employees contribute 35% to Australia’s GDP. Together, they employ 44% of all Australian workers. Small businesses are also motors of innovation, accounting for 92% of all Australian companies which innovate, thus driving increases in productivity and economic growth.

Kickstarting the engine - short-term support for Australia's Small Businesses

Small businesses are the bedrock of the Australian economy, but they are suffering disproportionally through the COVID-19 crisis. With limited cash reserves and limited access to capital relative to larger businesses, many small businesses have been riding out the times of lockdown and uncertainty by relying on government support, tax holidays (e.g. federal income tax), concessions handed down by state and territory governments, and the limited personal reserves of SME owners. This situation is exacerbated in Victoria, where the introduction of Stage 4 lockdowns is presenting a significant challenge.

While the Australian Government has extended the JobKeeper program to March 2021, and revised eligibility criteria for businesses and employees as recently as last week, this payment support — a lifeline for businesses and sole traders — will eventually be phased out. The provisions policymakers put in place now to ensure that businesses can survive on their own will be critical for the vibrancy and future strength of the Australian economy.

Some avid free marketeers may argue that we should let these businesses fail. But a pandemic doesn't give you creative destruction—it destroys otherwise-viable businesses that would have been just fine with adequate access to insurance and capital. And business disruption due to COVID-19 is on an unprecedented scale. A ‘laissez-faire’ attitude would likely result in a devastating loss of businesses and firm-specific human capital that would set back the Australian economy for years to come. The links between businesses and their workers, as well as suppliers and customers, are valuable; a loss of a business reverberates through the local economy. On a large scale, it could be cataclysmic.

Many otherwise-viable small businesses are suffering not due to poor business practice, but because of legally mandated lockdowns and the economic uncertainty wrought by COVID-19. There was no escaping this economic fallout—the majority of countries that did less to contain the virus than Australia had much larger economic contractions. But having done their part to help halt the contagion, the small businesses affected deserve the support of policymakers.

At Blueprint Institute, we are deeply concerned that governments will miss vital opportunities to ensure the survival of Australia’s vibrant small business community. What can governments do to ensure a soft landing? A lot, we believe. 

This Blueprint seeks to enrich the public discussion by making policy recommendations that are practical and economically sound. We outline three problems currently confronting small businesses — access to capital, insolvency, and skill shortages— and proposes innovative and timely solutions to these problems within three key recommendations:

Recommendation 1: Capital on tap New HECS-style loans for small businesses

Publicly-funded loans for private enterprise may seem like a radical idea, but we are living in unprecedented economic times. Capital is the fuel that drives innovation in small businesses. Without it, small business owners will be hampered in their efforts to provide goods and services in a post-COVID economy. Without capital assistance, many small businesses will not survive the lockdowns.

At Blueprint Institute, we believe urgent government action is needed to provide small businesses with fast and unbureaucratic access to capital. We recommend introducing HECS-style loans to achieve this goal. These would offer small businesses certainty and peace of mind because repayments would be contingent on future revenue.  

We recommend:

A new small business HECS-style loan system

  • Blueprint Institute recommends that the Federal Government provide time-limited, revenue-contingent small business loans as part of support for the sector.
  • A HECS-style loan system for small businesses would drive much-needed business investment and job creation. It should thus be considered separately from the JobKeeper program in stimulus discussions.
  • Loan arrangements could be available until the end of 2021, at which point the program should be assessed for its uptake, repayment levels, effect on business investment, and its broader economic return.
  • These subsidised loans would be repayable from future revenues — the loans are subsidised in the sense that they offer businesses a zero real interest rate, which may equate to a saving of 3-4% of the loan value per year until it is paid off. Indexation would be added each year in line with increases to the consumer price index to maintain the true value of the loan.
  • A HECS loan system would represent a defensive investment that could decrease overall government spending during the period of virus prevalence and economic recovery. This system may reduce the cost and burden of other schemes (such as JobSeeker) as viable businesses would be provided with the capital they need to lead the economic recovery and support jobs. 

End the Coronavirus SME Guarantee Scheme

  • The new HECS-style loan program should replace the Coronavirus SME Guarantee Scheme. While we support the Government’s commitment to helping small businesses, the existing program has been largely ineffective in driving capital to the sector.
  • Funding for the $20 billion Coronavirus SME Guarantee Scheme should be redirected to this new small business loan program. This means that putting this recommendation into practice would not require new spending commitments from the Government.

Financial health checks for small businesses

  • Loans should only be available to viable small businesses to avoid wasteful spending and reduce exposure for taxpayers. The Government should engage licensed private practitioners to assess, via financial health checks, whether the business was financially viable prior to COVID-19. Small businesses that pass a financial health check would be eligible for the new loans. 
  • Financial health checks could be funded through a voucher system, paid by the taxpayer and administered by the ATO, with proceeds going to a trusted small business advisor (accountant, bookkeeper or other registered professional) who understands the business in question. Successful applicants could have the cost of the financial health check added to their loan amount to minimise cost to taxpayers. Additional conditions could be applied to reduce risk to taxpayer funds — for example, loans might only be available to businesses that have lodged 2 years of tax returns.

  • Extensive public education campaigns should be conducted to inform small business owners about the HECS-style loan program.

Cost: $20 billion has already been allocated for the SME Guarantee Scheme, so this should simply be repurposed for a HECS-style scheme. There may be some additional costs to the budget from loan defaults given the higher uptake of HECS-style revenue-contingent loans and the fact that the Government is funding the entire loan amount, not 50% of the loan (as with the SME Guarantee Scheme). 

While it is too early to say what default rates may be for the SME Loan Guarantee, let us conservatively assume a 100% repayment rate for these loans. If an 80% repayment target is set for the HECS-style revenue-contingent loans (the same repayment rate as existing HECS loans), this would represent a cost of $3.85 billion to the Government in loan defaults

During our consultation process, leading economists noted that default rates are actually likely to be lower with revenue-contingent loans than traditional bank loans, as repayments are only dependent on a business remaining viable and receiving revenue at some point in the future. Default rates will be lowered further due to financial health checks determining businesses’ viability prior to loan approval. In contrast, a typical bank loan requires businesses to service ongoing interest payments regardless of revenue, thus adding pressure to already strained balance sheets. When considering the cost, we must also consider the counterfactual to this scheme: less businesses surviving post COVID-19.

Recommendation 2: New ‘Insolvency Checkpoint’ program for small businesses

Business insolvencies are at record lows, suggesting a large number of ‘zombie’ companies are currently being propped up by JobKeeper. As JobKeeper payments are gradually rolled back, small businesses must have the ability to restructure their operations in an orderly manner. 

The financial health check, discussed above, will provide high quality financial advice to small businesses who are in trouble — small business owners who complete the check would be well-positioned to restructure or liquidate their business. However, to provide adequate time for these processes to run their course, COVID Safe Harbour measures should be extended to the end of March 2021. In addition, Blueprint Institute urges the Government to establish an education campaign to inform small businesses and sole traders on the brink of insolvency of both their legal rights under COVID Safe Harbour and the availability of the financial health check. Such an ‘Insolvency Checkpoint’ program would take some immediate pressure off businesses that are facing hardship but have good prospects of recovering from the crisis. It would also give small businesses more time to consider the most effective method of repaying creditors to free up capital for investment and job creation.

We recommend:

Extend COVID ‘Safe Harbour’ provisions

  • Introduced in March 2020, COVID Safe Harbour measures provide protection from liability, for directors of small businesses and sole traders, for insolvent trading that occurs in the ordinary course of business — until the end of September 2020. At the same time, it increased the minimum debt that can form the basis of statutory action ($20,000 from $2,000), and the time in which companies must pay that debt (from 21 days to 6 months), providing breathing room for small businesses to deal with financial issues without facing winding up proceedings. To ensure the efficacy of the proposed insolvency program, the Government should extend COVID-19 Safe Harbour mechanisms until March 2021, for those businesses that complete a financial health check, in line with the extension to JobKeeper. 

Offer taxpayer-funded vouchers for financial health checks 

  • As part of the financial health checks mentioned above, small business owners should be provided with clear information as to their options, whether their business is viable, and if so, which strategy will offer them the best chance to survive and thrive. 
  • These financial health checks should be delivered by a business' existing trusted advisor, such as an accountant, tax agent or bookkeeper. In this way, the financial health checks can be delivered in a timely manner, and also act as a safeguard against poor advice from non-qualified and/or exploitative actors. 
  • Cost: the cost of providing financial health check vouchers to small businesses (assuming 66% uptake) would be $4.4 billion; while this represents a significant investment for the Federal Government, it is a reasonably small amount in the context of overall stimulus spending. Further, it is likely to drastically increase the efficacy of the Government’s other policies targeted at saving jobs by strengthening the viability of small businesses through provision of high quality advice and planning for restructuring. This covers the cost of financial health checks relevant to recommendations 1 and 2.

Recommendation 3: Fast-tracking skilled migration - open the border for small business to recruit global talent

At the end of 2019, over 50% of small businesses said that availability of suitable labour was limiting their output; these shortages will likely increase as the continued restrictions on foreign arrivals and a lack of visa extensions limit the capacity of small businesses to access skilled labour. 

Blueprint Institute urges the Government to promote a skilled migration and visa pathway for small businesses, even as borders remain closed due to the pandemic. This would require a tiered system that streamlines applications and burdens small business owners with lower costs than large businesses when recruiting skilled foreign workers. The skill needs of the small business sector should be prioritised in any scheme to drive innovative activity, both because they are disproportionately affected by the lockdowns and because they are the primary drivers of innovation in our economy.

We recommend:

Streamlining visa approvals for those already in Australia

  • For migrant workers who are already in Australia, the Government should prioritise approvals for visa renewals where small businesses wish to employ workers.

Skilled migration targets and fee waivers for small business

  • To meet the skill needs of small businesses and ensure the labour market functions smoothly, the Government should set a target for temporary and permanent skilled migration that encourages workers with skills in critical areas (such as medical services, engineering, construction, technology, advanced manufacturing and cybersecurity) to enter the country, even when borders are closed. 
  • As an additional incentive to draw foreign talent into Australia’s small business sector, the Government could consider reducing or waiving expensive fees for visa applications and hotel quarantine. 
  • Cost: the exact cost of this program depends on the exact arrangement the Government settles upon, and whether costs are passed to businesses or taxpayers. The contribution of highly-skilled migrants in economic output and taxation is likely to dwarf even a generous approach to this program. Migrants to Australia contribute far more in taxes than they receive in welfare, and even during the current economic turmoil and recovery, this is likely to remain true. 


The Australian public is in favour of the Government supporting small businesses

Blueprint Institute believes that support for small business is a question of values, and that most Australians value fairness and the role of aspiration in our economy. Our recent polling supports this view.  

83 per cent of Australians support innovative policy which helps to level the playing field between small and large businesses to make it easier for small businesses to thrive.  

Australians also feel for small businesses and want them supported through this crisis. In response to the current economic crisis, 63 per cent of Australians said they would shop local to support small businesses, compared to just eight per cent who said they would shop at large businesses. 

Definition of ‘Small Business’

There are a number of definitions for small business in Australia. In recent years, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), the Australian Taxation Office (ATO) and the Australian Bureau of Statistics have used different definitions of small business. The ASBFEO prefers to use the same definition as the ATO: that a small business is one that has less than AUD$10 million turnover. This is the basis of our definition of small business, and it applies to 98% of Australian businesses. 

A huge proportion of these are very small — 95% of Australian businesses are very small (those with a turnover between $75,000 and $2 million) or micro (those with a turnover of under $75,000) in size. Another approach defines small businesses as those that employ less than 20 people; under this definition, 98% of Australian small businesses are ‘small’. Occasionally, we will use these more conservative definitions of ‘small businesses’ in this Blueprint paper in order to incorporate the widest amount of available data and statistics. Whenever we do so, we clearly note it in the text. Otherwise, all references to small businesses refer to the definition of a company with less than $10m in turnover.

Small businesses are the powerhouse of Australia’s economy. Those with less than 20 employees contribute 35% to Australia’s GDP. Together, they employ 44% of all Australian workers. Small businesses are also motors of innovation, accounting for 92% of all Australian companies which innovate, thus driving increases in productivity and economic growth.

Sign up to our mailing list here