An outline of the research, SME Credit Constraints and Macroeconomic Effects, is to be delivered at an ESRI/Department of Finance conference today on ‘SME Financing: Recent Trends and Policy Options.’
The research by Petra Gerlach-Kristen, Brian O’Connell and Conor O’Toole, which is expected to be published in full in the coming weeks, shows that finding customers for their products or services is the largest problem for small and medium enterprises (SMEs) in Ireland today.
ESRI research fellow Conor O’Toole said credit constraints rank third as a problem and affect only a small minority of SMEs — between 4% and 11% — depending on the classification.
“Most SMEs do currently not apply for funding because they do not need it. Those facing credit constraints are mainly young, small firms and firms that have a domestic customer base and a debt overhang. Their main response to the constraints is to reduce investment and jobs.”
Mr O’Toole said this clearly has immediate and longer-term consequences for employment and economic growth.
“Consequently it is appropriate that policy explores ways of reducing these credit constraints. Measures tackling specific problems, such as the Microenterprise Loan Fund, seem particularly promising. The extent to which the financial system can provide adequate funding for firms once aggregate demand recovers remains an open question. Further research on the financing of SMEs is needed to establish this,” he said.
At today’s conference, Adrian Devitt of Forfás will deliver a paper ‘Review of the Equity Investment Landscape in Ireland’, in which he argues promoting equity investment represents an opportunity to support growth-oriented viable businesses and to provide alternatives to bank funding, particularly for indebted firms.
“We need to place a stronger focus now on encouraging private sector investment in productive firms. The argument for a greater range of financing options is strong. More varied financing options gives businesses greater choice, promotes competition amongst finance providers, potentially reduces cost, and leads to greater resilience in the financial system.” he said.
Mr Devitt said that while external equity investment is only a viable option for a minority of firms, research highlights that its use is growing, adding the provision and use of equity is largely guided by the market but there are actions the State can take.