When people say small businesses are the backbone of the Irish economy, they’re not kidding. Companies that employ less than 50 make up more than 98 per cent of all businesses in Ireland.
Their economic importance cannot therefore be overstated. In the labour market alone, small firms account for just under half (49 per cent) of all those employed in the private sector.
Central Bank research shows small firms account for 31.6 per cent of gross value added (GVA) – or, in other words, make up one third of the total value of the Irish economy.
That’s the good news. The bad news is that it’s hard for them to succeed. According to the Small Firms Association, less than one in two new companies formed in any given year are still trading five years later.
While there are very many reasons a business may fail, lack of access to finance should be, in theory at least, a declining cause.
For a start, the Government’s Strategic Banking Corporation of Ireland (SBCI), set up in response to the credit crisis, is on course to provide €1.25 billion in lower-cost, longer-term loans for working capital and capital investment to Irish SMEs, channelled through not just banks, but alternative finance providers too.
Peer-to-peer lending platforms such as Linked Finance and Grid are also providing a fresh source of funds. Having started out at typical loan size of about €20,000, Linked Finance recently raised its loan ceiling to €250,000, at interest rates ranging from 8.5 per cent to 15 per cent
Microfinance Ireland (MFI), established in 2012, is increasingly active too, last year approving small business loans worth €5.4 million, to a total of €17 million to date.
It recently launched a new four-tier loan package for small businesses, three of which offer finance of up to €25,000. All are unsecured, which means business owners don’t have to give personal guarantees.
And for small businesses in need of emergency funding, the fourth loan package offers sums of between €2,000 and €5,000, with credit decisions made within 72 hours and interest-only payments applying for the first three months.
Borrowers also get a free mentoring package provided by experts from their local enterprise office and paid for by MFI.
And if the applicant comes through an MFI channel partner – which includes the local enterprise offices, local development companies and commercial banks – a reduced interest rate of 6.8 per cent applies.
SMEs have also benefitted from a return to more normalised bank lending conditions, with a safety net provided by the team at the Credit Review Office. It was established by the government in 2010 to provide a review process for SMEs, sole traders and farm enterprises refused credit from banks.
Its annual reports chart the move from basic business survival in the period 2010-2012, to banks dealing with legacy debts through restructuring in 2013-2015, to the current trend of financing growth for recovery, according to CRO boss John Trethowan.
Despite all these initiatives, the predominant mood among small business borrowers is one of caution, according to Ray Murphy, sales director of Fiat Auto Finance. It is part of Finance Ireland, one of the SBCI's non-bank channel partners.
“Our customers are SMEs and sole traders looking to buy cars, vans, fleet, forklift and yellow plant machinery, at an average loan size of €30,000, and mostly second-hand assets. It’s a space in which SMEs typically have difficulty funding – there’s plenty of interest in €300,000 deals, but not for the guy who wants one or two vans, or a second-hand digger. Yet there is a lot of demand for just that type of asset,” says Murphy.
This desire not to overspend, or over borrow, is a characteristic of the market and a legacy of the bust.
“SMEs are growing, but tentatively. They are borrowing, but not splurging. Guys come in looking for a second-hand digger that, eight or nine years ago, they would have wanted to buy new. Equally, we deal with a lot of fleets, and those guys don’t want to buy a car for a new staff member until someone is six or seven months on the job, so they are looking for mid-term leases instead. It’s a mark of the caution out there but finance providers have to provide a range of different options to suit that fact.”
The increased number of finance providers is boosting service for borrowers. At Fiat Auto Finance, deals under €50,000 can be decided in four hours. And, unlike traditional bank lending, the emphasis is not so much on the borrowing company’s history so much as on the deal itself.
“There’s an acceptance that people went through some very tough times. If you can show you are coming out the other side, that’s what we look for. Our remit is to go out there and do deals and we reckon we understand SMEs because we are one too,” says Murphy.
The need for alternatives to traditional bank lending was seen at first hand by Adrian Sainsbury, banking division managing director at Close Brothers UK. "In Ireland [Close Brothers] saw growth throughout the crisis of 20 per cent per annum," he says.
And there is potential for much more. “Most SMEs in Ireland are micro-businesses, where the owner-manager may not have a full understanding of the finance options available to them. Typically, what they will do is talk to their bank manger or accountant about this, but the bank manager may have a preference for their own products, while the accountant may not be fully familiar with the range of products now available. There isn’t yet that awareness there that if a business is struggling to secure funding, to buy a piece of kit say, it may have assets it doesn’t even realise it can use to secure that funding,” says Sainsbury.
“And, unfortunately, high decline rates from standard banks can see SME owners disengage from the financing side altogether, resulting in opportunities lost. That’s a wasted opportunity for the whole economy.”