State to guarantee €400m in loans for start-ups
THE Government will force the banks to loan an extra €400m a year to kick start new companies, the Irish Independent has learned.
Thousands of new businesses will soon benefit from a new government loan guarantee to secure funding from the banks.
The fledgling firms -- the type seen on the 'Dragons' Den' television series -- would not currently qualify for a loan because they do not have the collateral to back up their enterprise.
It is hoped the scheme, which will be discussed by the Cabinet tomorrow, will lift small and medium-sized businesses out of the credit freeze and help create more than 25,000 jobs.
The Government will effectively go guarantor on the loans from the banks and promise to cover a large portion of the debt if the business fails.
The banks will still loan the money, but under tight supervision from the Government to ensure the guarantee is not being abused.
In an exclusive interview with the Irish Independent, Enterprise Minister Richard Bruton said the scheme is one of a series of new banking measures aimed at opening lines of credit for businesses.
"It is designed to fill what is clearly a market failure at the moment, where a lot of small-to-medium enterprises can't get access to credit. Some of them can't get access because banks are risk averse and if there isn't collateral to back up a good business, they won't touch it," he said.
"And others simply are in sectors that banks aren't familiar with."
Mr Bruton said the partial loan guarantee scheme will:
- Result in €1.2bn in lending over three years.
- Benefit 13,000 small and medium businesses.
- Create 25,500 jobs -- 18,500 directly and 7,000 spin-offs.
- Be worth €300m to the economy, from income tax and PRSI returns, social welfare and additional exports.
Mr Bruton said the risk will be shared by the State, the lenders and borrowers.
The guarantee will cover anything up to 70pc of the risk. The borrowers will be charged a 1pc to 2pc rate of interest as the price of the guarantee.
The scheme will not exclude any companies, but will see limits placed on the amounts that can be loaned out in specific sectors to cap the exposure of the State.
Mr Bruton said the plan is based on the experience in other countries, and it will be run in line with best practice internationally.
"Most countries have loan guarantee schemes of this nature, even in normal times, because they recognise the difficulty of smaller enterprises, particularly in key sectors," he said.
Mr Bruton said new laws will have to be passed to allow the scheme to be set up.
"There will be strict criteria to ensure the banks aren't unloading onto us loans that are of a weak nature," he said.
Mr Bruton said the partial loan guarantee scheme will be linked to the 'jobs Budget' to be announced next month.
To boost job creation, the Government will reduce employers' PRSI, reduce the lower rate of VAT, seek to place graduates in companies and make it easier for small companies to invest in research and development.