The credit guarantee system needs to be overhauled if SMEs and lenders engage in any meaningful way

Last week, the government announced the extension of the Covid-19 Credit Guarantee Scheme (CCGS) until the end of this year.

Good news for some, one might say, but the CCGS has struggled to gain adoption by the SME sector.

When it was announced in July of last year, it was touted as “the largest business credit guarantee scheme in the history of the state”.

We were delighted to welcome it but feared that it would not have the impact expected by the Government.

On the surface, the CCGS was awesome. It was about 2 billion euros of credit, available in facilities of 10,000 to 1 million euros, up to five and a half years, the State guaranteeing 80% of the loans.

Loans of less than € 250,000 did not require any personal guarantee.

Eight months, however, of the € 2bn available, € 358m in applications were filed by companies, of which € 215m were approved.

This is an 11% “success rate”, slightly lower than the 13% average drawdown rate of the old credit guarantee scheme that preceded it.

What were the issues with this?

It seems that even with the state taking 80% of the note if borrowers could not pay, lenders did not see many SMEs as a valid lending risk.

We have heard of a number of cases where the mainstay banks have attempted to get very liquid companies that did not need the money to apply for the program, while other companies that actually needed the funds to apply for the program. turnover have been refused credit under the CCGS.

There was also a marked reluctance among SMEs to use debt financing.

It was therefore a scheme that neither the borrowers nor the lenders wanted to avail themselves of.

Some of the other programs have been very successful.

The restart grants, channeled by local authorities, approved 445 million euros in grants out of the 685 million euros available, for a success rate of 65%.

The future growth loan program, which is a debt plan repayable over 7 to 10 years, lent € 675 million out of the € 800 million available, or 84% of the funds.

The latter shows that there is an appetite for debt if the pitch is right.

What else could we do to make the CCGS more attractive?

Well the UK equivalent – known as Bounce Loans – had a 100% state guarantee for loans up to £ 50,000, interest free in the first year and a rate of 2.5% per the following.

They turned out to be a huge success.

The Payroll Protection Program in the United States allowed companies to request full loan waivers when employee numbers and pay were maintained and at least 60% of the loan was spent on payroll.

The American regime is very generous, but it reflects the systemic importance of SMEs to the economy.

Ireland has a similar dependence on the SME sector.

Irish SMEs account for 55% of PAYE and USC paid in the economy, 58% of PRSI paid, 63% of VAT paid, 62% of income in the productive sector and 74% of jobs in the productive sector.

It is in the interests of the Treasury – and, indeed, all of us – that this sector survive the Covid-19 pandemic.

We don’t know what the ultimate effects of Covid-19 will be on Irish businesses.

Ireland has imposed the longest and second strictest lockdown in the world, but the number of infections has stopped falling.

Finance Minister Paschal Donohoe extended the credit guarantee program last week, but many believe a complete overhaul is needed.

We hope the government has not lost the room.

It is evident that the longer the lockdown continues, the less companies will emerge from this pandemic as active businesses.

Every 1% of small businesses that fail will result in about 16,000 job losses.

Some insolvent companies can be restructured, and Isme called on the government to introduce an affordable “summary bailout” process as soon as possible.

As we reach what hopefully is the end of the pandemic with the deployment of the vaccine, we must recognize the serious damage that has been done to our economy.

If the CCGS is to contribute to the recovery, it will have to be reformed.

  • Neil McDonnell is the Managing Director of Isme
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