Everything You Need To Know About The Credit Guarantee Scheme

A lifeline for SMEs

The Irish government agreed back in May that extra support would be given to companies that continue to suffer hardship in light of COVID-19. The €2 billion COVID-19 Credit Guarantee Scheme (CGS) is one of the measures unveiled.

Applications for the scheme are now open, and are set to run until the end of the year.

What is the COVID-19 Credit Guarantee Scheme?

Small and medium sized enterprises have been extremely hard hit by the COVID-19 crisis. But as the backbone of the Irish economy they’re essential to the country’s growth.

In recognition of this, the Credit Guarantee Scheme allows businesses to benefit from government-backed loans guaranteed by participating Irish banks. Any SME can apply, as long as they’re based in the Republic of Ireland and employ 499 people or fewer.

What kind of businesses qualify for the scheme?

This CGS scheme is being offered to Irish SMEs and small Mid-Cap businesses, to include primary producers (businesses in the fishing and farming sectors). The businesses must also have been negatively affected by the COVID-19 pandemic, having lost a minimum of 15% in actual or projected turnover or profit because of the outbreak.

More details about the scheme, which businesses are eligible and how to apply can be found on the SBCI website.

How much are the loans worth?

CGS loans are worth between €10,000 and €1 million. The maximum term is five-and-a-half years. Financing products include term loans, overdrafts and working capital loans.

Loans of €250,000 or under will be unsecured (except where this is a requirement of the product feature. This is the case for invoice discount facilities, asset finance, etc).

Who takes on the risk?

The liability for the loans will be shared between the participating bank and the government. The government will guarantee the participating banks against 80% of losses on every loan taken. The banks will then take responsibility for the remaining 20%.

What interest rate will apply to these loans?

CGS loans are being offered below market interest rates (we’ll look at the specifics of this further down). However it appears that the interest rate being touted is actually the standard SME interest rate plus a premium currently set at 0.5%. Critics have called for clarity on this.

Which finance providers are participating in the scheme?

There are a number of finance providers taking part in the COVID-19 Credit Guarantee Scheme including Bank of Ireland, Ulster Bank and AIB. Other lenders are also expected to come online in due course.

A full list of a participating finance providers can be found on the SBCI website.

Recent controversy

It has been advertised that borrowers using the COVID-19 Credit Guarantee Scheme can borrow money at far below usual lending rates. However, there has been criticism of the fact that once insurance fees are loaded onto bills the deal isn’t as good as it seems. Additionally, despite a notional €2 billion size, only about a third of that money is available to borrow so far. The banks will be charging interest rates as low as 2.48% - but once compulsory state insurance charges are added, the borrow cost will actually be closer to 5%. For longer term loans this will ratchet up the price of borrowing substantially, hitting primary producers hardest of all.

How much are the additional insurance charges?

The state is adding mandatory insurance charges of between 0.15% and 0.68% on loans for SMEs. However, the rate being levied on primary producers are even stiffer, will additional premiums adding from 0.3% to 1.55%. This in effect means that a maximum-term, unsecured loan from Ulster Bank to a primary producer will bring about costs equivalent to 5.03% per year. The equivalent loan will cost 3.16% for an SME.

Is there a deferred payment option?

Yes potentially, but this will be decided on a case by case basis by the lender.

What is the State Aid basis for the COVID-19 Credit Guarantee Scheme?

Loans under the COVID-19 Credit Guarantee Scheme are subject to the rules of the State Aid Temporary Framework. It’s worth noting that this could affect any subsequent claim for R&D Tax Credits - please do contact us to discuss.

How do you apply for the COVID-19 Credit Guarantee Scheme?

SMEs who wish to benefit from the COVID-19 Credit Guarantee Scheme need to get in touch with a participating bank in order to apply. Once an application has been made, banks will assess it in detail before deciding whether or not to lend. How each bank will consider applications may be slightly different, and it’s possible that criteria could evolve over time.

The whole point of the COVID-19 Credit Guarantee Scheme is to support businesses that would traditionally be considered higher risk to lenders. Add in COVID-19 woes and it’s likely that without the CGS these businesses wouldn’t be able to borrow at all. This of course will make the scheme a lifeline for many.

Even so, SMEs making use of CGS will still need to be commercially viable and in good financial health. But how this will be measured by banks longer term remains to be seen, particularly in this tough economic climate.

Like many of other COVID-19 supports, there has been some criticism that the lending criteria has been hastily cobbled together. Even though the scheme is open, there are still questions that have gone unanswered, particularly around how banks will understand fully what the risk is they’re taking on.

The Department of Business, Enterprise and Innovation has made it clear that businesses should be using CGS financial supports to adjust their business to better respond to COVID-19 challenges. They are very specific about this purpose. This means businesses should not be using the loans simply to boost their working capital.

Use the Tax Cloud portal to make your R&D Tax Credits claim

If your company is located in the Republic of Ireland and has undertaken innovative research and development activities recently then R&D Tax Credits could assist with the cost.

The Tax Cloud portal is a great value, fully guided solution to making an R&D Tax Credits claim tailored to your business. It’s a hassle-free, fast and easy way to calculate what you may be owed, and of course the R&D specialists at Myriad Associates (developers of the Tax Cloud) are on hand to help.

See the Tax Cloud portal for businesses to sign up for free and begin your claim today. Or if you’d like to discuss how the CGS may affect your claim for R&D Tax Credits please do speak to our team.

Barrie Dowsett, ACMA, GCMA
Author Barrie Dowsett, ACMA, GCMA CEO, Tax Cloud
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