Irish SMEs ‘too reliant on bank funding’

Irish SMEs are among the most heavily reliant on banks for funding, although since the financial crash there has been a move to trade credit and equity for working capital.

“This helps provide context to the debate around SME credit policy, in showing that the indigenous private sector, is and has been, disproportionately exposed to weakness in the banking system, relative to other European countries,” according to the Central Bank.

The findings are in a study of SME funding in 2005 and 2012 by Central Bank economists Martina Lawless, Fergal McCann and Conor O’Toole.

They argue that while banks will play an important role in the funding of SMEs in the future, a more diversified mix of funding options than those available would represent a more sustainable long-run Irish SME financing environment.

The authors note that there are a number of initiatives at both a national and an EU level that are exploring options around non-bank SME funding.

The Central Bank economic letter looks at two studies into SME funding. The first of these was carried out in 2005 during the height of the credit-fuelled boom. The second study was in 2012 which was after the banking crash.

In 2005, Irish SMEs had the second highest dependence in the EU on banks to fund working capital and investment.

This had changed significantly by last year. There was still a very high dependence on bank funding. However, there had been a significant increase in equity and trade credit to fund working capital requirements. Moreover, the number of firms that used internal funds to cover investment increased by 33% between 2005 and 2012.

The number of firms using equity financing and trade finance for investment purposes also increased significantly between 2005 and 2012.

There have been a number of studies carried out over the past few years that show that Irish firms are among the most disadvantaged in the EU in terms of accessing finance. This has been attributed to a lack of demand due to high levels of existing debt and the inability of banks to lend because of weak balance sheets.

“While a diversification away from bank finance is desirable, it is important that policy makers mitigate the risk that firms are turning to other under-developed and costly forms of financing due to an inability to access bank credit.”

“Policy must aim simultaneously to stimulate the flow of bank credit and to create well-developed markets for a range of alternative financing sources to complement the role of banks in financing the SME segment in Ireland.”