Highest refusal rate for smallest firms

ANALYSIS:THE INDEPENDENT survey on business lending showed that banks were still providing credit to small firms but the smallest companies were being refused most.

Mark Fielding, chief executive of small firms lobby group Isme, said he had “to take the findings on the chin”. The report showed credit was still available, despite surveys by his organisation showing the refusal rate to be double that found by Mazars.

Small and medium-sized enterprises (SMEs) had led a vocal campaign claiming their access to credit had been severely curtailed as a result of the financial crisis. Not so, said the banking sector.

The Government decided to see who was right by asking accountants Mazars to research the matter. Under the €7 billion recapitalisation of Bank of Ireland and Allied Irish Banks, the banks agreed to fund the study. Ulster Bank, National Irish Bank and Anglo Irish Bank also participated.

The study found total lending to SMEs remained “relatively static” at €34.5 billion for the nine months from the start of June 2008 to the end of February 2009.

The banks showed they were declining on average 14 per cent of credit applications, while SMEs said the refusal rate was higher, at an average of 24 per cent, rising to 30 per cent for “micro-companies”, defined as firms with fewer than 10 employees and a turnover of less than €2 million.

The differing figures can be attributed to the opposing perceptions of what constitutes a credit application. The conclusions are further complicated by the fact that Mazars could not determine from the banks’ information whether new applications were from new or existing customers.

Mazars concluded that this suggested banks were renegotiating and restructuring credit facilities, extending loan periods and accepting interest-only payments, given that total lending was flat.

This backs up the view that banks are primarily looking after existing customers rather than taking on new risks.

Mazars found no significant changes in credit rules, but reported an increased emphasis on personal guarantees and security.

The report recommends measures to support working capital needs for SMEs and to help them understand how to apply for credit.