The Microfinance Ireland business loan is encouraging borrowing which could be "dangerous" for small businesses, a representative group has said.
Neil McDonnell, Chief Executive of The Irish Small and Medium Enterprises Association (ISME), says the government should be focusing on grants rather than loans for these businesses.
The Covid-19 Business Loan from Microfinance Ireland is a government initiative to support microenterprises affected by the pandemic, and is expected to pass through the Dáil when it reconvenes on Tuesday.
Microenterprises not in a position to avail of bank finance and experiencing a negative impact at a minimum of 15% of actual or projected turnover or profit are encouraged to apply for the scheme for up to €50,000.
A business is considered a micro-enterprise if it has fewer than 10 full-time employees and less than €2m annual turnover.
The loan terms are up to a maximum of three years, with six months interest free, and a rate of 4.5% if submitted through Local Enterprise Office and 5.5% if you apply to Microfinance Ireland directly.
ISME say that Ireland has lagged behind other EU countries in terms of it's support for small businesses.
"There are a number of difficulties for us with the entire suite of measures put on the table so far," Mr McDonnell said.
"Small businesses affected by Covid are reluctant to take on debt anyway at this time even at cheap rates.
"The rate is in the 4.5% range, the state provider shouldn't be doing loans at commercial rates.
"People are still going through normal application criteria and some of them are finding it difficult.
"Our position is small businesses at this stage need grants, no strings attached.
Realistically small businesses need cash in the door now.
"It would be dangerous to take on loans and debt.
"There has only been €100m drawn down of all business liquidity support, which is chronically small, by comparison with what the UK has done with start-up loans and Germany for example have been much more aggressive in supporting small business."
Mr McDonnell says there is a change of mindset needed on how the government views small business. The group previously told the Oireachtas Covid Committee that the government was "fixated" on multinationals.
"There's an inherent conservatism in the public expenditure department, there are not enough people in there with exposure to small business, they don't know what they're doing," he said.
"It's a comprehension problem, they don't realise how important the sector is, and what we're saying politely is; They'll know about it when they go under.
"More than half of USC, PAYE and two-thirds of VAT comes out of this sector.
"People who are doing well in Covid are mostly in the retail space, the service business has been decimated, tourism, hospitality, food, a lot of man in van in services, have been radically suppressed by Covid and they're being asked to work their way out of trouble by taking on debt."