ICO guarantees extended into 2021 and to eight years

On 24 November 2020 the Council of Ministers approved new agreements on the guarantee lines of the Official Credit Institute (ICO) launched because of the pandemic, which total €140 billion. Self-employed people and companies will be able to apply for guaranteed loans until 1 June 2021, and those loans may be granted until 30 June 2021. The maturity period of guarantees already granted was also extended. The changes are applied through the financial institutions, which receive and process the applications.

The change responds to what had been foreseeable since the summer: for many companies, the guaranteed loans that gave them liquidity in spring would start to require repayments at a time when income remained low. Lengthening terms reduces the annual instalment, but increases the total cost of the debt and the time spent indebted. It should be analysed calmly, and not accepted as an automatic step just because it is available.

What is extended

There are three distinct measures. The first extends the timetable for requesting new guaranteed loans, until 1 June 2021, with granting until 30 June. The second allows the maturity of loans already guaranteed to be lengthened by up to three additional years, with a maximum total term of eight years. The third adds a principal grace period of 12 months, without total grace exceeding 24.

These changes require that the beneficiary is not in arrears or in insolvency proceedings. The same package also released new tranches of the guarantee line for investment created in July and maintained backing for the mutual guarantee societies, which facilitate credit to small businesses with few guarantees of their own. The specific terms are applied by each financial institution within the approved framework.

Advantages and costs

Lengthening a loan’s term reduces the monthly instalment, easing cash flow, and the principal grace period allows paying only interest for a while. For a company whose income has not yet recovered, it can make the difference between holding on and entering a spiral of defaults, provided the business has reasonable prospects of generating cash again. A longer term can also improve the ratios that banks and suppliers look at when assessing a company’s solvency.

The cost is that interest is paid for longer and the debt remains on the balance sheet, which limits the capacity to borrow for future investments. In addition, the guarantee covers only part of the loan, and the rest of the risk falls on the lender and, often, on personal guarantees from the owners. The decision should therefore be a conscious one and backed by a plan.

What to review

Before requesting a change, review the maturities of all loans, how much falls due in the next twelve months and how it compares with expected income. It is advisable to talk to the lender in advance: modification requests require processing and paperwork, and lenders handle many cases at once. Acting early allows offers to be compared and avoids deciding in a rush when maturities are already upon you.

It is also worth calculating the total cost of each alternative, including interest and fees, and checking whether the conditions of the line include associated obligations. This is general information: each operation has its own conditions, and should be discussed with your financial adviser and the lender before deciding.

Gaining time is gaining breathing space, provided the business plan justifies the effort.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.