Small and Medium Enterprises (SMEs) are a key part of the economy. They account for over 70 per cent of private sector employment in an economy that heavily relies on the sector for growth and for job creation. The financial difficulties that SMEs now face, while significant, are not insuperable. SMEs find they are financially constrained, partly by their own high level of property-related debt, but mainly by their limited access to bank credit. And the banks, because of their large number of non-performing loans, are unable to borrow at competitive rates to finance their lending. As a result the supply of credit to the SME sector remains tight, and limited.
The OECD, in its report on Ireland, noted that banks have met the targets set by the Government for lending to SMEs. However, it found that two-thirds of new SME lending is just rolled over on existing loans, while the overall stock of lending to SMEs is declining.
The challenge for the sector, given the limited availability of bank credit, is to increase its reliance on non-bank finance. Irish SMEs, a Central Bank study has found, are more reliant on bank borrowing than most of their European counterparts. The authors of the study, like the OECD, also favour a wider range of funding options for the SME sector. The Government, via three new long-term funds established by the National Pension Reserve Fund, has gone some way towards establishing alternative sources of finance. But the Government needs to do more to encourage entrepreneurs now greatly discouraged by the disincentives to investment and risk taking – high marginal tax rates at low levels of income, and rates of capital taxation two-thirds higher in five years. Much time and attention, rightly, has been given to the defence of Ireland’s 12.5 per cent rate of corporate tax from international attack. Too little time has been spent in encouraging and facilitating a spirit of enterprise, one that could help ensure more Irish entrepreneurs can succeed, and in time benefit from that low corporate tax rate.