Small and medium businesses more reliant on bank support
Central Bank study calls for more diversified mix of funding options
The Central Bank study says SMEs have been “disproportionately exposed” to weaknesses in the banking sector. Photograph: David Sleator
Irish small and medium businesses rely more on bank support than most of their peers across Europe and, as a result have been “disproportionately exposed” to weaknesses in the sector, a study from the Central Bank has found.
However, both demand for and supply of bank borrowing has fallen significantly since 2005 – with the figure halving by 2012.
“A more diversified mix of funding options than those currently available would represent a more sustainable long-run Irish SME financing environment,” the authors of the study argue.
“Policy must aim to stimulate the flow of credit and to create well-developed markets for a range of alternative financing sources to complement the role of banks in financing SMEs in Ireland”.
Sources of funding
The study examined sources of funding for smaller and medium-sized businesses both pre- and post-crisis, and found that, over both periods, Irish SMEs are either the most, or second most, reliant on bank borrowing, across 13 European countries.
In 2005, before the crisis erupted, the proportion of Irish SMEs that used bank borrowing to finance investment or working capital was the second highest across Europe, behind Germany, the figures show.
Seven years later, in 2012, despite the squeeze on liquidity, Ireland remained among those countries with the highest usage of banks for SME funding – with the highest proportion of firms reporting that they used bank overdrafts.
Given the tightening up of credit, and the focus by SMEs on meeting everyday financing needs, rather than seeking out funding for growth, Irish SMEs are now beginning to use other sources of finance more than in the past. Internal funding (for investment), along with trade credit and equity (for both investment and working capital)are being used more intensively by Irish SMEs in 2012 than in 2005, the report says, suggesting that a substitution from bank to alternative financing has taken place.