The Covid-19 Credit Guarantee Scheme (CGS) for which legislation was launched in the Dáil this week will make low-cost loans available to businesses impacted by the pandemic.
The scheme should see cheap and unsecured finance in the amount of up to €2bn made available to businesses within a matter of weeks.
As with other credit guarantee schemes, the Covid-19 CGS will be operated by the Strategic Banking Corporation of Ireland and will be available initially through three banks (AIB, Bank of Ireland and Ulster Bank), and it may be rolled out to other financial institutions in due course.
The interest rates on the facilities have not yet been confirmed, and each financial institution may apply its own margin on top of SCBI’s cost of finance. It is hoped that the interest rate will be below 4%, as was the case with previous finance schemes.
Importantly, the scheme will be available to primary producers, including farmers, which is a welcome move, with farmers locked out of some other SCBI funding such as the Brexit Loan Scheme.
Access to credit is critically important in the short term.
However, from a farmer’s perspective, it’s unfortunate that true low-cost loans at rates of 2% and below are not available to Irish farmers, despite being available to other farmers in the EU.
Indeed, interest rates of 6.5% and above are common here for unsecured farm loans, north of 8% for overdrafts, and unsubsidised hire purchase finance generally quoted at 5% and above.
Given that banks are effectively borrowing money at near zero per cent, the financial institutions involved in lending to farmers are beefing up their profits and milking it better than their cattle and dairy farmer clients.
It is also unfortunate that farmers don’t have much capacity to negotiate on the rates available.
For many lenders, the interest rate quoted is the only rate available, despite having a proven track record or a low-risk profile.
In the past couple of weeks, the EU sanctioned a €30m loan scheme for Italian farmers, allowing loans of up to €30,000 per entity at zero per cent interest.
The Irish scheme will nonetheless be the largest credit guarantee scheme for businesses in the history of the State. It will be available for a wide range of products including overdrafts, term loans and working capital and it is expected that amounts available under the scheme will be between €10,000 and €1m, with a potential term of up to six years. Applications for the scheme will be open initially until 31 December 2020.
At the upper echelons of lending, at €1m per applicant, the scheme would cover a maximum of 2,000 such applicants.
At the other end of the spectrum, if each applicant applied for the minimum funding of €10,000, the credit guarantee scheme could cover up to 200,000 applicants.
Given that the funding is available to all SME sectors, it is plausible that applications for the funds could be oversubscribed, and therefore farmers should apply early if they wish to ensure their application will be considered.
The Tánaiste and Minister for Enterprise, Trade and Employment Leo Varadkar stated: “We want to help viable businesses to get through the difficult phase of reopening and deal with the new realities and challenges posed by Covid-19. The Credit Guarantee Scheme will provide low-cost loans to businesses and will in turn help more people to get back to work.”
In order to qualify for the Scheme, the borrower will have to declare an adverse impact of minimum 15% of actual or projected turnover or profit due to the impact of Covid-19.
The recent report by Teagasc economists exploring the possible impact of Covid-19 on farm incomes in Ireland this year indicated a drop of between 22% and 50% in farm profits, depending on the scenario analysed.
Their report compared the income forecast for 2020 without the Covid-19 pandemic to the expected revised position.
The report from Teagasc will be particularly useful to many farmers seeking to avail of finance under the Credit Guarantee Scheme in terms of backing their assertions that farm profits have reduced.
Of course, each farmer will need to assess their position based on their own facts.
The exact terms of the Credit Guarantee Scheme will become clearer once the legislation is enacted and when financial institutions roll out their offerings.