Many of you will be familiar with the 'If Carlsberg Did' series of ads.
I contacted MFI recently to clarify some of the conditions of its Covid-19 loan and I was pleasantly surprised with the answers. If you are a micro business in need of a loan, this is as good as it gets. If Carlsberg did a business loan, this would probably be it.
Before looking at why the loan is so good, it helps to understand who MFI is.
MFI stands for Microfinance Ireland and it is a not-for-profit lender. It was established by the government in 2012 to deliver its Microenterprise Loan Fund - it basically provides an alternative source of funding to micro-enterprises (both new and existing) – who may be having difficulties in accessing finance from commercial providers.
MFI’s ultimate goal is to support the creation and/or retention of jobs.
It was established because micro businesses (any business with less than 10 employees, an annual turnover of less than €2M and a balance sheet with net worth that does not exceed €2 million) were struggling to access credit through the banks. These businesses needed money for investments and working capital if they were to recover from the deep recession.
Because of its origins and objectives, it is very pro-business.
When loan applications are reviewed, the assessors are generally trying to find a way to approve the loan, rather than looking for reasons not to.
It takes on what are considered to be riskier loans than the banks. Its role is to lend money to micro businesses that the banks consider too risky.
So why is the new MFI Covid-19 specific loan so good? This particular loan has been put in place to help micro businesses through the difficult period ahead – both during the restrictions and after.
Under the scheme you can borrow between €5,000 and €50,000, subject to meeting certain criteria. It can be used to fund working capital or for changes required to your business due to Covid-19. Full details of eligibility criteria and terms and conditions are available on the MFI website - https://microfinance
The key features of the loan are;
It is an unsecured loan – i.e. no personal guarantees required.
No repayment for the first 6 months.
Interest free for the first 6 months.
No fees and / or hidden costs with fixed repayments. There are no penalties for early repayment.
Interest rate is 5.5%, but this is reduced to 4.5% if you apply through the Local Enterprise Office.
Normal loan term is 3 years, but this can be extended to 5 years in some circumstances.
The fact that it is unsecured will appeal to business owners, but the real beauty of this loan is its flexibility and how you can use this to your advantage.
Businesses are currently trying to plan for re-opening. In most cases it is difficult to forecast what sales will look like following re-opening.
If it is difficult to estimate sales, it is also difficult to work out how much extra funding will be required. The flexibility built into the MFI Covid-19 loan helps to address this issue.
Take the case of a small retail store that would need a working capital loan of €20,000 if sales were at 50% of its pre-Covid-19 levels in the period following re-opening. If sales came back at 100%, it might only need a working capital loan of €5,000. The MFI loan allows this business owner to apply for a €20,000 loan – i.e. planning for the worst case.
Once the loan is approved, the business owner has 21 days to accept the loan, and another 60 days before it has to draw the money down.
Following draw down, there are no repayments or interest to be paid for the first 6 months.
Suppose the retailer in the above example got approval for and drew down the €20,000 MFI loan in June.
If sales are strong following re-opening the owner may be able to repay all of the €20,000 in December – as it wasn’t needed due to having strong sales.
In this case there are no interest charges, no fees, or penalties and in effect the business has had use of the money for 6 months at no cost.
That is an optimistic scenario. Perhaps the business is only able to repay €15,000 of the €20,000 in December. In this case, MFI will issue a variation letter and repayments will be based on a loan of €5,000 rather than €20,000.
The monthly repayment on the €5,000 loan is €179 per month, versus €714 per month on €20,000.
The loan allows lump sum repayments at any stage during the term of the loan and there are no penalties or fees applied for repaying the outstanding balance at any stage.
There are no charges if you run late with some repayments.
While MFI would prefer this didn’t happen, it does not impose financial penalties on businesses that are already struggling to meet the repayments.
Finally, the application process is straightforward, and the turnaround time of applications is relatively fast.
You can generally have your loan reviewed and have a verdict within a few weeks from date of application, but this is likely to increase as the level of applications increases. For those that need help with the application, the Local Enterprise Office is generally happy to provide assistance.
While nobody wants to take on more debt, sometimes it is a necessary evil.
The challenge for most businesses will be to survive the shutdown and the difficult trading period after re-opening.
If a loan is needed to do this, then the MFI Covid-19 loan is a great option for micro businesses.
It may be possible to use it in conjunction with government grants. The government is still trying to figure out what can be put in place in terms of grants.
It has announced a restart grant for micro and small businesses but the details of how this will work are not yet available.
It looks like it will be based on a rebate or waiver for commercial rates from 2019 and that it will be capped at €10,000 – note if your rates bill was say only €1,500 you only get a grant of €1,500.
Other grants are likely to be announced in the coming weeks / months. Until such time as the grant picture becomes clearer, micro businesses should avail of the MFI Covid-19 loan.
The flexibility of the loan makes it ideal – if you do subsequently qualify and secure government grants, you can repay the MFI loan without any penalties.
If you get the grant within 6 months, then you can repay the MFI loan and avoid any costs associated with it.