On March 15, publican Richard Harrington locked the black wood-panelled doors of the Quays Bar in Bantry, Co Cork, not knowing when they would re-open. The next morning, he received a text from Finbarr O’Shea, the chief executive of the town’s credit union, offering support and a pause in his business loan repayments. “A small message like that gave me reassurance,” Harrington says, even though he has not yet availed of the repayment break.

To this date, the pub and restaurant facing the seafront on the Wild Atlantic Way has remained closed to locals and tourists. Harrington and his staff – six full-time, five part-time – have been on the Pandemic Unemployment Payment. 

When the lockdown ends, he will need cash. 

“There’s no reserve, it’s like you’re starting again from day one,” Harrington says. He is grateful to suppliers who took back stock when the pub closed down, and he will now need to replenish food and drink before re-opening. The business is also facing the expense of Perspex partitions and carpentry work to ensure physical distancing, sanitizing units in the bathrooms, plus fresh working capital. 

Harrington says he expects to borrow around €10,000 to make this happen. His first port of call will be Bantry Credit Union. Most of his current debt is with AIB, which refinanced the mortgage on the pub running for another nine years. Harrington “paid top dollar for it in the boom” in 2004. “We owe so much to AIB, I can’t see them lending us any more,” he says. And the text he received from the credit union, followed up by a phone call three weeks later, makes all the difference. Even if interest rates are likely to be slightly higher, “they are the backbone of the community,” Harrington says.

“The message is: we’re open for business, we are member-owned co-ops, we are there for you.”

Finbarr O’Shea, Bantry Credit Union

Finbarr O’Shea says his credit union will look favourably on applications by local businesses looking for finance to emerge from the Covid-19 paralysis. “We would do our damnedest to make it happen,” he says. “Obviously, all the necessary steps, checks and procedures would have to be complied with. But if this was a business with a good track record (and I don’t mean a track record with the credit union; I mean a business track record in the town) – a business that is trying to re-establish itself as we come out of lockdown – then the credit union would work very closely and very flexibly with that business.”

Bantry Credit Union is unusual in the high proportion of business loans already on its books – primarily to farmers. O’Shea chairs the group of 26 credit unions who are jointly marketing their agricultural loan offer under the Cultivate brand, launched three years ago. While new applications have dried up for now, he is adamant that credit unions are still lending. 

The Cultivate group, which put together a marketing budget for the brand in February, paused it in March when the pandemic hit. “In April, we decided to go ahead as planned,” says O’Shea. “The message is: we’re open for business, we are member-owned co-ops, we are there for you.”

Another of O’Shea’s customers is Jessie Hurley, co-owner of a hair and beauty salon in Bantry and a smaller one in Clonakilty. Just like publican Richard Harrington, she has laid off her 18 staff – “We’re doing a bit of online training to keep them up to date.” She, too, is facing a cash crunch when business resumes. The only silver lining for Hurley is that she also has a food business, which is not affected.

“There will be a lot of PPE”

Revenue at the salons has not only stopped coming in, but some has also gone back out. “We cater a lot for weddings,” Hurley says. With cancellations, she’s had to refund deposits. “When you have 20 weddings with a €200 deposit each, that’s €4,000.”

Meanwhile, she is just beginning to count the cost of extra expenses, knowing that turnover will be smaller when her salons re-open. “There will be a lot of PPE,” she says. A new hand sanitising station will require plumbing and the staff room must be reconfigured to accommodate breaks safely. 

While a screen can separate staff and customers for jobs such as nails, other business will take longer to resume. “We do facials, waxing, massages – some of this we won’t be able to do,” Hurley says. A potential 15-minute cap on face-to-face interaction would cut most hairdressing appointments short. And the weekend rush, with 15 customers and staff in salons at a time, will need to be spaced out.

At this early stage, Hurley’s ballpark estimate is that she’ll need to borrow between €10,000 and €15,000 to get going again. She will shop around for this. “The credit union would be a good starting point for me, they’re easy to deal with,” she says. This is where she got her first loan to open her business over 20 years ago, aged 18. But she will also look for “a good rate and the ability to repay faster as things improve,” she adds.

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The anticipated need for emergency finance among Irish SMEs comes at a time when credit unions can lend them more than at any point in their history. Out of €18.33 billion in assets, the state’s 241 credit unions have only €5.11 billion in outstanding loans. On January 1, the Central Bank made changes to the sector’s regulation, following two years of consultations.

While credit unions could previously lend to businesses only for terms of less than five years, this has been replaced by so-called concentration limits. They can now use up to 5 per cent of their assets to make business loans, and larger credit unions with assets of over €100 million can apply to the Central Bank to raise this ceiling.

Out of €18 billion in deposits, this means credit unions can now lend €900 million to businesses. According to Ed Farrell, chief executive of the Irish League of Credit Unions (ILCU), their existing commercial loans book is worth around €100 million, leaving €800 million available if they wish to lend it to SMEs.

“If a business is trading at 30 or 40 per cent of capacity, lenders will have to look at their cash flow and repayment capacity.”

Ed Farrell, ILCU

Farrell says that while the ILCU’s 220 credit unions in the Republic were largely absent from business lending before the 2008 financial crisis, they have grown this activity ever since. They currently have around 6,000 commercial loans on their books, with the average business borrowing €18,000 at an interest rate of 6 per cent.

Cultivate farm loans have been the most advanced example of this, with a Central Bank derogation to extend terms to seven years. The average borrowing in this category was €23,554 last year, funding working capital as well as investments like farm buildings or tractors.

With Minister for Finance Paschal Donohoe now warning that income support schemes may be tapered out from June, Farrell first expects those businesses which already have loans with credit unions to seek forbearance – using the three-month repayment break options agreed by all lenders, now under discussion to be extended to six months.

A second step would see new applications come in once businesses have clarity around the gradual lifting of restrictions, and lending can be tailored to the new reality. “If a business is trading at 30 or 40 per cent of capacity, lenders will have to look at their cash flow and repayment capacity,” Farrell says. “We’re not grant organisations, much as we want to take part in the recovery,” he warns.

“If they can demonstrate they were doing good business, they can do that again.”

Kevin Johnson, CUDA

Kevin Johnson, CEO of the Credit Union Development Association (a separate umbrella organisation), is of the same view. “Credit unions are going to be there for businesses to rebuild themselves,” he says, having learned from their increased presence in this market since the financial crisis. He points out that the health shock to the economy was not caused by businesses themselves: “It’s not their fault that they’re in this predicament. If they can demonstrate they were doing good business, they can do that again.”

Johnson adds that credit unions have a strong capital base, highlighting their 16.5 per cent average realised reserves. “That’s very solid. You build those for a rainy day, and it’s raining now.” As long as members savings are not put at risk, they are available to lend out, he says.

The movement is also eager to take part in any government-supported finance schemes under preparation to help the recovery. Previous examples, such as subsidised loans targeting companies affected by Brexit, were distributed through pillar banks – but new lending rules allowing credit unions to make unsecured business loans of up to 10 years mean they could now join in.

On Saturday, the Government announced a state guarantee scheme for SMEs allowing them to borrow between €10,000 and €1 million for up to six years at reduced interest rates. “The credit union would have to pay a premium to get the guarantee. It reduces the risk, so the interest rate could be lower,” says Farrell following discussions with the Departments of Finance and Business.

The scheme, which is subject to legislation being passed through the Oireachtas by a new Government, would cover 80 per cent of each loan’s risk over a finance pool of €2 billion. While it is an expansion of existing state guarantees available through AIB, Bank of Ireland and Ulster Bank, “it will be possible for other lenders to get access to the scheme,” the Government stated – up to a portfolio cap of 50 per cent.

Farrell warns, however, that not all credit unions want to lend to businesses, making the €800 million aggregate available fund a hypothetical number only. The 5 per cent of assets they can now lend to SMEs are lumped together with mortgage-type house loans under an overall limit ranging from 7.5 per cent for smaller institutions to a maximum of 15 per cent of assets at larger credit unions.

While the Central Bank allows them to use this entire pool of finance for house loans, they cannot do the same for business lending. Farrell says some industry credit unions, such as those catering to categories of civil servants, are more likely to allocate their full limit to house loans. 

“It boggles me why the Central Bank bundled them together. They are very different risks.”

Michael Byrne, Core Credit Union

The Core Credit Union serving the south shore of Dublin Bay from Dun Laoighre to Shankill is one of them. Although it is one of the most progressive in the sector, offering services such as current accounts and soon home insurance, it has shelved plans to move into business lending. While it does take applications for business loans, and currently has 40 on its books, it is not actively marketing this service. 

“We were advanced in hiring a commercial lender to push business lending, but draft legislation in early 2019 meant we pulled the plug,” says its chief executive Michael Byrne. Under new rules, the Core Credit Union can lend 7.5 per cent of its assets across house and business loans. Its existing loan book means it currently has €4.5 million available for borrowers.

“We have huge demand for house loans,” says Byrne. This alone will hit the limit, making it pointless to develop a separate business product. “It boggles me why the Central Bank bundled them together. They are very different risks,” he adds.

Byrne says business lending is “part and parcel of what we do” and could form a large part of credit union lending. “I spoke to people in the UK who lend start-up money, including with EU funds. It doesn’t have to be all our member’s money. The opportunity is massive,” he adds.

For the time being, however, demand for the Core Credit Union’s more common personal and car loans has been divided by five in the midst of the Covid-19 crisis.