Small and medium-sized enterprises (SMEs) may at times have financing or loan needs. In the midst of an economic downturn, many SMEs will be faced with increased operating pressure. To ease the business burden on SMEs, the Government launched the SME Financing Guarantee Scheme (SFGS) a few years ago and has been continually enhancing SFGS with differentiated loan products. In recent years, it introduced 80% Guarantee Product (SFGS 80), 90% Guarantee Product (SFGS 90) and the Special 100% Loan Guarantee (SFGS 100).
Under SFGS, the Government guarantees loans to help SMEs in Hong Kong secure financing with lower interest rates. This article aims to prepare SMEs interested in applying for the SFGS by covering potential challenges that may be encountered in the application process.
Businesses interested in the SME Financing Guarantee Scheme (SFGS) can apply through any bank. It is worth noting that banks in general require the applicant to have an existing bank account with them when they process the application. Therefore, banks will usually request businesses to open a bank account when they apply for SFGS.
As banks assess the applicant company’s risk profile when approving loans, there is no doubt that businesses will have certain advantage when they apply to the bank they normally bank with. This is because the bank will already have some of the company’s past business records, thereby enabling the bank to better grasp the company’s operating condition. Also, banks can offer more competitive lending rates for SFGS 90 and SFGS 80 depending on the length of the relationship between the applicant and the bank.
Different banks offer different benefits to SMEs under the SME Financing Guarantee Scheme (SFGS). SFGS 90 and SFGS 80 are most commonly accompanied with a subsidy on the guarantee fee (i.e. the guarantee fee paid to the HKMC Insurance Limited, HKMCI). HSBC, for instance, provides 100% subsidy of the first-year guarantee fee and 50% subsidy of the second-year fee to successful applicants, valid until the end of June 2022. The guarantee fee subsidy is capped at HK$25,000 each year, which amounts to a maximum subsidy of HK$50,000 for two years. HSBC has recently announced additional support measures of waiving handling fees for new SFGS 90 applicants who apply through HSBC, valid until the end of December 2020. Banks may offer principal moratorium and waive loan handling and account opening fees.
The Special 100% Loan Guarantee (SFGS 100) is different from the other two. The Government has laid down a main principle that the annual interest rates offered by banks are to be set at HKMCI Prime Rate minus 2.5% per annum (i.e. the prevailing effective rate is 2.75%)*, and that the guarantee fee is to be waived. As for repayment period, the maximum length of time to repay is 36 months. Additionally, businesses can repay the interest without having to pay the principal in the first 12 months. For more details, please contact individual banks.
The Special 100% Loan Guarantee (SFGS 100) is different from the other two Guarantee Products. The Government has standardised the annual interest rate at Prime Rate minus 2.5% per annum (i.e. the prevailing effective rate is 2.75%)*. As such, irrespective of your application to any bank, you will get the same interest rate on the loan.
If businesses meet the application requirements of more than one product, it is recommended that they assess their financing needs. For instance, if the financing needs are less than HK$4 million, and if the sales turnover has declined by more than 30%, they can first apply for SFGS 100; if the business lacks business operation records, or their financing needs are less than HK$8 million, they should consider applying for SFGS 90.
No matter which Guarantee Product(s) you apply for, the bank will treat each application as a single loan application, and will make the loan decision based on their standard risk assessment. As such, the annual interest rate should not vary much. On the other hand, it is noteworthy that HKMCI may want to find out why the business has submitted multiple applications, which may affect the approval process.
Besides, under the enhancement measures, the Government will provide interest subsidy for the 80% and 90% guaranteed loans, with the amount of subsidy subject to a cap of 3%. Each loan is entitled to an interest subsidy for a maximum period of 12 months. The payment of interest subsidy will be automatically deposited into relevant bank accounts, and no application is required.
Finally, note that SFGS 80 and SFGS 90 offer slightly different types of loans. SFGS 90 offers only installment loans, while SFGS 80 offers trade finance and revolving loans. Therefore, businesses should consider SFGS 80 if they have higher capital needs, or wish to have a tailor-made Guarantee Product.
In the event of a sharp drop in sales turnover, consider applying for the Special 100% Loan Guarantee (SFGS 100) to get a loan up to HK$4 million. For additional financing needs, you may apply for other Guarantee Products such as SFGS 90 or SFGS 80.
If a business has applied for one of the Guarantee Products such as SFGS 90 and needs additional funds, they may discuss with banks their need to apply for SFGS 80 as a means to meet their new funding requirements. For example, consider a business that has borrowed HK$8 million of SFGS 90 (i.e. which is the maximum amount for that particular loan product), and has a subsequent funding need of HK$5 million. This company may apply to banks for SFGS 80. The loan terms and conditions of the original SFGS 90 will not be affected by the new application, and the guarantee fee for both applications will not increase as a result.
* HSBC offers its Prime Rate – 2.25% which means its prevailing effective rate is also 2.75%
For more information on products under the SME Financing Guarantee Scheme (SFGS) and application procedures, you may read relevant articles on HSBC VisionGo: