An analysis of how it really works for a business, by Phil Aldridge.

Monday 20th April 2020 will see the start of applications being taken for the HKSAR 100% Loan Guarantee Scheme.

The scheme was announced on Feb 26th 2020 during the budget and the official announcement can be seen at this link:-

https://www.info.gov.hk/gia/general/202002/26/P2020022600506.htm

It has taken almost 8 weeks from announcement to the point where applications can be taken.  Applications are currently allowed for 12 months from April 20th.  There have been updates since the announcement and the maximum loan amount per applicant is now HK$4M and the total amount of funding put towards the 100% Loan Guarantee is HK$50Billion.  This loan scheme is being run by the Hong Kong Mortgage Corporation (HKMCI), but applications and processing is being managed by the banks in Hong Kong.

Now we get to the key point of this where many small business owners misinterpret the wording “100% Loan Guarantee”.

  • Firstly, this does NOT mean the applicant is guaranteed 100% that they will get the loan.
  • Secondly, this does NOT mean that the HKSAR Government is providing a 100% Guarantee for the loan to the applicant.

 

This 100% Loan Guarantee is between the HKSR Government, Hong Kong Mortgage Corporation and the Lending Institute.  Please ensure you are clear on this one single aspect.

According to the HKMCI rules regarding this loan scheme the Lending Institute WILL request the applicant to sign a Personal Guarantee.  In fact, 70% of the applicant’s business shareholders will have to sign a “joint and several liability” guarantee to the bank.  To be clear it is a requirement of this scheme that the lending institute obtains the personal guarantee as they are required to do this by the rules set out by the HKMCI.

This means if you have 3 equal shareholders and you want to take out a HK$2M 100% Loan Guarantee with a bank then each shareholder will be required to sign a personal guarantee for the FULL HK$2M.  This is such that should the applicant’s business be unable to repay the loan the bank will be able to try to recover the outstanding money from the shareholders who signed the guarantee.  If the bank fails to recover the money from the shareholders, then they will recover the money from the HKSAR Government through the Hong Kong Mortgage Corporation.  To be clear this is not a collateral asset guarantee but a personal guarantee so you need to fully understand the implications of this.

Therefore, I would urge anyone looking to take about this loan to ensure you are confident your business WILL be able to repay the loan.  If your business is in a very poor situation due to the protests and now the Covid-19 pandemic and you are not confident that your business can repay this loan then I urge you to talk carefully with a professional advisor and ensure you fully understand the consequences of the personal guarantee you will be asked to sign.

Remember this is a loan.  It is not a grant.  The loan is expected to be paid back in full.

If you are all ok with what is written above the read on for the technical aspects of this scheme.

The rules regarding eligibility for the loan are as follows: –

  1. The applicant’s business must be a Hong Kong registered business and have been in operations for t lest 3 months by the 31st December 2019.
  2. The applicant’s business must have seen a 30% decline in turnover in any single month since February 2020 compared with the monthly average turnover of any quarter from 2019. To be clear the quarter used must be one of the following 4: –
    1. 1st January 2019 – 31st March 2019
    2. 1st April 2019 – 30th June 2019
    3. 1st July 2019 – 31st August 2019
    4. 1st September 2019 – 31st December 2019.

The applicant cannot make the figures from any random quarter in 2019.  This is not clear in the official documentation, so I have tried to make it clear by being very specific.

  1. The applicant cannot be currently under any bankruptcy or winding up order and should have no delinquency in the last 60 days at the time of application.

 

Other key points to note are: –

  • The applicant can still apply for this loan even if they have an existing 80% or 90% Government Guaranteed Loan in place.
  • Maximum Loan term is 36 months.
  • There is a principal moratorium for 6 months which can be extended an additional 6 months meaning the Loan principal can be deferred and only interest needs to be paid in this first 6 or 12 months. However, the outstanding principal must be paid back within the maximum loan term.
  • Interest is calculated at the HKMC HKD Prime Rate – 2.5%. Hong Kong’s current HKMC Prime Rate is 5.25% so the actual current interest rate applicable to the loan is 2.75%.
  • The maximum amount that can be borrowed is based on 6 months wages and 6 months rent the applicants business pays or HK$4 million whichever is lower.
  • Processing time is expected to be between 10 – 14 working days from submission to funds available. This may vary depending if you are an existing customer of the bank or not.

 

Documents that are needed to be submitted are: –

  • Proof of wages from MPF for last three months
  • Rental document with receipts for two months.
  • If the applicants own the office property, then the rates from last 6 months.
  • Proof that the turnover has reduced by 30%. You could use the income statements or bank statements to demonstrate this.  Your accountant will be able to produce this for you.

 

To be clear I neither work for a bank, the government nor the Hong Kong Mortgage Corporation.  I am the chair of the SME and Startup Committee for The British Chamber of Commerce in Hong Kong and as such I am trying to make it clear to any HK Business looking to take out this 100% Loan Guarantee product exactly what the process is, what they should expect and what they need to prepare.  For more details please approach one of the lending institutes who will be happy to tell you more.

If you would like to talk to me regarding this process or give me some updates on how your experience was getting this loan please email me on phil.aldridge@dev.functioneight.com and I will be happy to discuss this with you.