Neil McDonnell: Credit guarantee scheme needs overhaul if SMEs and lenders to engage meaningfully

When it was announced in July last year, it was touted as “the largest credit guarantee scheme for businesses in the history of the State".  

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

On the surface, the CCGS was great. It was €2bn of credit, available in facilities from €10,000 to €1m, for up to five and a half years, with the State guaranteeing 80% of loans. 

Loans below €250,000 required no personal security.

Eight months in, however, of the €2bn available, applications of €358m have been made by businesses, of which approvals of €215m have been made. 

This is a “success rate” of 11%, a little lower than the average 13% drawdown rate of the old credit guarantee scheme which preceded it.

What were the issues with it?

It seems that even with the State picking up 80% of the tab if borrowers couldn’t pay, the lenders did not view many SMEs as a worthwhile lending risk.

We heard of a number of cases where the pillar banks tried to get highly liquid businesses which did not need the cash to apply for the scheme, while other businesses in real need of working capital were refused credit under the CCGS.

There was also a marked reluctance among SMEs to avail of debt finance. 

So this was a scheme of which neither borrowers nor lenders were keen to avail.

Some of the other schemes have been highly successful. 

The restart grants, channelled through local authorities, have approved €445m of grants from the €685m available — a 65% success rate.

The future growth loan scheme, which is a debt scheme repayable over seven to 10 years, has loaned €675m of the €800m 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-back loans — had a 100% state guarantee for loans up to £50,000, with no interest in year one and a 2.5% rate thereafter. 

They have proved to be a huge success.

The payroll protection programme in the US allowed businesses to apply for full loan forgiveness where employee numbers and pay were maintained and where at least 60% of the loan was spent on payroll.

The American scheme 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 the PAYE and USC paid in the economy, 58% of PRSI paid, 63% of Vat paid, 62% of earnings in the productive sector, and 74% of jobs in the productive sector. 

It is in the interest of the exchequer — and, indeed, all of us — that this sector survives the Covid-19 pandemic.

It isn’t clear to us what the ultimate effects of Covid-19 on Irish businesses will be. 

Ireland has enforced the longest and second-strictest lockdown in the world, yet the infection numbers have stopped falling. 

We hope that the Government hasn’t lost the room.

It is obvious that the longer lockdown extends, the fewer businesses will emerge from this pandemic as going concerns.

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

Some insolvent businesses can be restructured, and Isme has asked the Government to introduce an affordable “summary rescue” process as soon as possible.

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

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

• Neil McDonnell is the chief executive of Isme