Vulture funds buying SME overdrafts

Pádraig Hoare

“Cash-strapped” small businesses are being hamstrung by rising rates of loan refusals from banks, with existing overdrafts now being sold to vulture funds, a body representing SMEs has warned.

Isme chief executive Neil McDonnell said the organisation’s latest quarterly business survey found a “significant increase in refusal rates” from 24% to 36% in the second quarter compared to the previous three months.

This is despite demand for credit remaining on par with the first quarter, Isme said. Almost one-third of SMEs required additional or new bank facilities in the last three months, according to the survey.

Isme chief executive Neil McDonnell.

The waiting time from decision to drawdown increased from six to eight weeks, the survey of more than 500 businesses found.

Isme is concerned at the high refusal rates and the length of time it is taking for SMEs to access finance, Mr McDonnell said.

He added that Isme is renewing calls for banks to promote the Strategic Banking Corporation of Ireland (SBCI) funds, a Government-backed SME financing arm.

“To see an increase of 12% in refusal rates is disappointing after consecutive decreases. Without sufficient access to finance, many SMEs will struggle.

“One member has reported to us their bank has sold their overdraft to a vulture fund. This is a first. We understand that our banks are still repairing their balance sheets, but they must consider the viability of their customers as they do so,” Mr McDonnell said.

He said the wait time of eight weeks to draw down a loan was “unacceptable” when time was of the essence to struggling businesses, adding interest rates were also prohibitive.

“This type of delay is starving already cash-strapped SMEs. On top of the delays and refusal rates, Irish SMEs are paying more interest on their loans. It costs on average 5% for an Irish SME to borrow €250,000 from a bank, compared with 3.3% across most of Europe,” Mr McDonnell claimed.

Isme is now encouraging SMEs to tap into alternative sources of finance, he said.

“Our reliance on the main pillar banks is unhealthy and this needs to change,” Mr McDonnell added.

Isme is calling for SBCI funds to be promoted by banks and used appropriately for SMEs, as well as “honest and reliable reporting” from the rescued banks through the Department of Finance and Central Bank.

It is calling for the Government to “investigate other sources of finance that can be made available to viable cash-starved SMEs”, as well as a reduction in the “uncompetitive interest rates charged to SMEs”.

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