Presentation to the Oireachtas Committee on Jobs, Enterprise and
Innovation on Access to Finance for SMEs
6th May 2014
Introduction
There is no overestimating the importance of the SME sector to the Irish economy. The
statistics are well known. 99% of all businesses are SMEs and they provide over 70% of all
employment in the State. While it may not be the responsibility of Government to directly
support these companies, it is their responsibility to provide a legislative and regulatory
environment that allows SMEs to compete fairly. SMEs must be supported as they transition
from the surviving the recession to, hopefully, growing with the recovery.
There is also no overestimating the scale of the challenges SMEs face:
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Costs of employment;
Rates burden;
Declining town and village centres;
Weak consumer confidence and poor domestic demand; and
Access to finance.
SMEs tend to operate in the domestic sector and have subsequently been hit hardest by the
recession. SMEs are less likely to seek credit, to be able to secure credit and be able to make
existing payments due to the unprecedented nature of the collapse in the economy with,
according to the ESRI, a peak to trough decline in demand of 20pc. This was only surpassed
by Iceland in the OECD since the millennium.
All of these areas are important and should be addressed.
Sources of Finance
When discussing access to finance, it is important to differentiate between different sources
of finance. The Central Bank distinguishes between bank credit flows and non-bank
alternatives; we contend that the main sources of finance are:
1. Direct Government interventions
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2. Bank lending
3. Individual/group investors and other Alternative sources of funding
Each of these present specific challenges for the SMEs.
Direct Government interventions
This Government has introduced a welcome suite of initiatives to boost finance to SMEs. Of
particular note are the Microfinance Fund and the Partial Credit Guarantee Scheme.
However, we contend that these are primarily designed to supply firms with investment
capital. While anecdotal evidence indicates a significant uptick in demand for Investment
Capital, over the past four years the issue has consistently been about working capital.
A lack of working capital has many knock on effects on business owners such as using
personal funds, delaying payments, not taking a personal wage and reducing wages. All of
these have a further impact on the wider economy.
Data from a recent survey carried out by our colleagues in Cork Chamber shows that the
number of businesses reporting difficulties in managing cash flow continued to rise
throughout 2013.
Businesses are finding that it is taking longer to pay their creditors and to be paid by their
debtors. This survey also raised the fact that 68% of all businesses do not think that there
has been any improvement in supports for businesses and SMEs over the past 12 months.
This should be of considerable concern for Government given the amount of rhetoric and
also new schemes that have been put in place in recent times.
We recognise that the Microfinance Fund has been established. However statistics show
that fewer than half of all applications are approved and the impact on job creation - while
welcome - is limited.1 Accordingly, we would recommend the expansion of this scheme to a
broader range of businesses.
We have also made a number of recommendations regarding the Loan Guarantee Scheme
in the past that bear repeating
1. Increase the level of guarantee. At present, the level of guarantee is quite low and
is often not enough to get a credit application approved.
2. Increase the number of financial products and sectors applicable under the
scheme. Currently, facilities such as overdrafts and re-structures are excluded along
with a number of sectors such as agriculture. Given that working capital is the vital
issue for business at present, the Credit Guarantee’s remit should be broadened to
embrace a wider range of sectors and offerings.
3. Remove the requirement to apply for a bank loan and have it rejected prior to
availing of the scheme. A business should be able to apply for financing under the
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http://microfinanceireland.ie/wp-content/uploads/2013/11/MFI-Progress-Report-Q3-September-2013.pdf
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scheme at first application rather than have to wait until the application has been
rejected by its bank using normal processes to make an application.
4. Increase the term of the guarantee to at least five years. Many SME loans are for
periods that are longer than three years, accordingly the term lengths of the
guarantee need to be more flexible with the potential to extend a loan guarantee to
a period that matches this reality in the market. In this way we can assure greater
take up of this worthwhile initiative.
Bank Lending
Bank lending remains one of the most problematic areas for SMEs. Our view is that the
successive surveys of Mazars and Red C undertaken and commissioned by the Department
of Finance are the most broad based and statistically accurate surveys available on this
contentious issue. We look forward to the latest six monthly report on from October 2013
to March 2014 on 12th May.
The results from the most recent survey bear repeating. In the six months to Sept 2013, ‘a
marked improvement in the trading conditions for Irish SMEs with improved turnover, profit
and staffing levels across different sizes and types of SMEs. However, more than 1 in 4
companies remain in challenging conditions.
At this stage, rather than resulting in an increase in credit demand, these improved trading
conditions have led to a reduced level of demand among SMEs in general, as working capital
demand for struggling smaller SMEs reduces. Sentiment among SMEs for the future remains
cautious, which could be interpreted that as yet this apparent reduction in “support”
demand, has not as yet been replaced by “growth” demand.
The overall approval rate for those seeking credit has improved. This may be as a result of
those in more financial difficulty not seeking credit at this time as trading improves. The
increased trend of more credit applications being approved in full continues.
The banks have also increased the number of credit decisions in the agreed timeframe, and
ensured that fewer SMEs can claim they were not told why they were declined. However
SMEs are claiming that more conditions are being attached to agreed credit.
While demand is down, there has been a continued improvement in the perception of
whether banks are lending to the sector. After significant gains in the last report, a high
proportion of SMEs again feel that banks are lending to a small number of SMEs, rather than
not lending at all.
However, the belief that banks are not lending remains an issue, with a significant
minority (7%) of SMEs not applying for credit because they believe the banks are not
lending. ’
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We would contend that the only sure way of addressing this issue is to encourage
businesses to complete full loan applications and – if these are rejected – to appeal them to
the Credit Review Office.
Refinancing debt with exiting banks
The other issue is providing services to businesses that are currently with banks that are
exiting the Irish market. These businesses face opportunities and threats arising from this
issue. This is a major challenge for the discrete numbers of businesses that are looking for a
new banker and also with the appetite of the remaining banks to take on these businesses.
For which solutions must be found.
Credit Review Office
We have consistently profiled and supported the work of the CRO around Ireland and
throughout our network. However it is hard to ignore the fact that despite the best efforts
of our organisations and others that the number of appeals processed by the CRO remains
very low.
Individual/group investors and other Alternative sources of funding
We recognise the Angel investors, Crowd Funding and other alternative sources of finance
can help SMEs survive, grow and develop, however it is our contention that, while welcome,
these will only play a relatively small role in the business funding landscape.
One sector where more needs to be done is the Enterprise Investment and Incentive
Scheme and also in the Seed Capital Scheme.
Chambers Ireland has consistently profiled issues with respect to these schemes in
successive pre budget submissions over the past years. We welcome that the Dept of
Finance has sought submissions in a review of these schemes and we will be making
submissions on how these can be further improved with a view to supporting new business
start-ups in the coming weeks.
Training Issues
There are still skills gaps in too many Irish SMEs.
Given the changed financial landscape, businesses have to upskill their financial analytical
skills to enable them to ‘talk the talk’ regarding securing new bank finance.
We note that the National Training Fund (NTF) is gathered via a compulsory levy on all
employers of 0.7%. This amounts to approximately €350m per annum. The vast majority of
this money is currently devoted to training ‘for employment.’ There is virtually no funding
available to employers to either up skill their management teams or staff. This does little to
assist firms at a time when they need it most. Accordingly, we continue to call for monies to
be made available from the NTF to be ring-fenced to support owner managers and the
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management teams of these SMEs on vital skills such as Cash Flow Analysis to enable these
firms to carry out the required cash flow analyses needed to complete a full and
comprehensive loan applications and talk knowledgeable to their banks.
Late payments
Government should give consideration to automatically paying the relevant interest
surcharge for late payments made not just by Public Service Departments of State, but also
by sub entities of Government, such as the HSE. In this way we can support businesses in
their everyday cash flows thereby reducing their working capital requirements.
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