Debt must be ‘on softest of terms’ to be of interest to SMEs

Lobby groups suggest grant aid may suit many small businesses better than debt

The State’s new credit guarantee scheme is likely to have a slim take-up, given that businesses are “completely debt averse” due to the Covid-19 pandemic, the boss of a lobby group has warned.

Neil McDonnell, chief executive of the Irish SME Association (ISME), said if small and medium-sized businesses were to take on any debt, even if the majority of it was guaranteed by the State, it would need to be on the “very softest of terms”.

The credit guarantee scheme will involve the State guaranteeing up to 80 per cent of low-cost loans for small businesses affected by the coronavirus pandemic. Minister for Business Leo Varadkar on Tuesday told RTÉ that the scheme would give access to loans on "much better terms and conditions" than those that can currently be accessed. He set it would be available from September or October.

But Mr McDonnell doubted whether the scheme would be popular.


“The Government would never say to the punter in the street: ‘You’ve lost your job, we’ll lend you money and you have to pay it back.’

“Our concern is that the nature of the 80 per cent guarantee means that the people who need money aren’t going to apply for it and the bank will still view the 20 per cent risk as too much.”

Mr McDonnell said the average SME owed €78,000 in trade credit to other businesses. The longer those businesses wait for grant funding, “the more of that €78,000 goes bad”, he said, adding that the liquidity crisis would become a solvency crisis which could then trouble the banks.

The Government should look at options other than supplying small businesses with debt, he said, even though those options may be more expensive. “Every single person who loses a job in an SME is a €10,500 charge on the social fund each year and that’s before you count PAYE, PRSI, etc,” he said.

Fergal O’Brien, director of policy and public affairs at Ibec, said the State had an opportunity here given that State aid rules were suspended.


“Because of the crisis we have an opportunity to get very low-cost loans into business; we should be taking that opportunity because we may not have that opportunity in 12-18 months’ time when we move beyond the State aid rules flexibility.

“One of the things we’re seeing from businesses trading internationally is that their competitors have a better cost of credit than the Irish business do,” he said, adding that while he was positive about the enactment of the credit guarantee scheme, “we’ll have to see the final detail”.

“The Revenue will be a significant credit requirement for a lot of business – that’s who they’ll owe a lot of debt to – so a good arrangement on debt warehousing is going to be very important,” said Mr O’Brien.

A previous iteration of the credit guarantee scheme had a 13 per cent take-up over the past eight years, Mr McDonnell said.

Some €1.2 billion has been available through the Strategic Banking Corporation of Ireland over the period, but businesses took up only €152 million under the scheme.

“The thing that has frustrated us is when you hear €2 or €3 billion committed, it’s complete nonsense if it’s not drawn down,” Mr McDonnell said.

Peter Hamilton

Peter Hamilton

Peter Hamilton is a contributor to The Irish Times specialising in business