In The Netherlands, the Dutch government helps SMEs during the coronavirus crisis by providing state guarantees. Under the Government Guarantee Scheme (BMKB-C), the Dutch government provides a partial guarantee for loans to companies that need capital in this crisis. October has recently been admitted to the list of financial institutions that can grant a loan under this guarantee scheme.
What is the Dutch State Guarantee?
It goes without saying that the coronavirus crisis has created a high level of economic uncertainty. As a result, lenders in general are less willing to provide credit. SMEs still need credit, sometimes for growth, more often in today's environment to continue paying bills and salaries, while their income is (temporarily) dropping.
In fear of a credit crunch and eventually the bankruptcy of SMEs, governments are reducing the risk for lenders with state guarantees. With a state guarantee the government covers a part of the loss in case a loan defaults. In other words, if a company cannot repay the loan, the state will partially repay for the company. As such they make it safer for you, as a lender, to lend to an SME.
With the current facility by the Dutch government approximately 65% of your outstanding amount will be covered at any time.
Calculation of the guarantee: The Dutch state guarantees 75% of a loan. When a loan defaults, 90% of the losses are covered, so 75% * 90% = 67.5%. However, the guarantee assumes a linear capital repayment, whereas loans on October are repaid through annuities. In annuities, capital repayments are relatively small at the start and become larger towards the maturity of a loan. As a result the guarantee won't cover 67.5% of the loan, but approximately 65%.
Below there's an example of a guaranteed loan of €100,000 with a duration of 24 months. The BMKB-C guarantee facility covers loans up to 2 million euro with a maximum duration of 48 months.
What companies are eligible to a Dutch State Guarantee?
The BMKB-C guarantee is only available to Dutch SMEs that are fundamentally healthy (i.e. profitable over 2019) and have or expect a liquidity need as a result of the corona-crisis. This has to be reflected in, for example, a decrease in turnover or a cancellation of orders. The guarantee is applicable only after the company has made use of other government Covid-19 measures, such as employee salary support. The guarantee covers new money only, hence the loan cannot be used to refinance existing loans.
Our goal is to help companies in their financing needs, while protecting the returns of our lenders. Therefore, we will only finance companies that were profitable in 2019 and experience a temporary setback due to coronavirus crisis. Moreover, we should be able to determine whether the company will recover when everything goes back to normal. As a result we will add criteria to our standard credit analysis and check if the company will be able to come back to the historical performance in a reasonable time.
To align the interests, the owner of the company has to give a personal guarantee of at least 10% of the loan amount.
When can the guarantee be called?
The state guarantee does not secure the continuance of a business. The business is merely provided with extra credit, to support the company during the coronavirus crisis. Nonetheless, no one can predict how the company will come out. In other words, your loan can default.
When there is no possibility of recovery, it is at the discretion of October to call the guarantee. It is very important to understand that the guarantee does not make a loan risk free. In case the loan defaults, you lose approximately 35% of your outstanding capital in the project. The process towards the pay out of the guarantee can be a lengthy process.
It is not ensured that the guarantee will be enforceable in case the loan defaults. The government checks whether the conditions of the guarantee were met after October calls the guarantee. In case the conditions of the guarantee were not met at the time the loan was granted, you may lose up to 100% of your outstanding capital.
How to invest
You can lend to state covered loans as to any other project on the platform. When a guarantee is granted, it will be mentioned in the project description. In the analyst's opinion we disclose our analysis of the current situation of the company in relation to the coronavirus crisis. The fact that the loan is partially covered by a state guarantee will be reflected in the interest rate of the project.