SMEs need a helping hand

Small and medium enterprises are the backbone of European economies — especially the peripheries.

They account for over 95% of the total number of businesses and well over 70% of the total jobs. Their contribution to economic resilience, particularly in rural areas, also means they have an enormous role to play in sustaining an austerity-blighted economy.

They have long been identified as being at the heart of innovation in Ireland’s knowledge economy.

The sheer scale of impaired bank loans to SMEs confirms the enormous problems imposed by misconceived austerity on the sector — it is now a major obstacle to maintaining jobs and, also, to financial stability. These impaired loans amount to half of total bank credit (about €25bn) to the sector, according to a recent speech by Fiona Muldoon of the Central Bank.

But it’s not the only obstacle.

Some 15% of all residential mortgages are impaired. Then there is the other side, as it were, of these impairments; that is, the negative pressures on the aggregate balance sheet of the banking sector, which is impacted by the scale of prospective writedowns in both of these sectors. Decisions by the banks on both lending and funding have come back to haunt them.

The point is that the present problems in these three domains are all interrelated. The Government knows this. The Central Bank, which has done commendable analytical work in modelling losses, knows this. So, too, do the banks. But it is SMEs, and especially small, family-related business, that are at the sharp end.

Traditionally the fact that the funding for many SMEs is generated within families has been important. It helps to substitute for lack of access to bank credit. Banks do not have much information on which to assess and price the risks associated with lending, especially with start-ups and SMEs. It’s also difficult to put a value on family solidarity, ‘conviction-equity’, and sheer tenacity. So families are an important source of capital in funding the design, start-up, and early expansion of SMEs.

This model has been turned on its head in Ireland over the last decade. In the run-up to 2008, many small(ish) family-related SMEs borrowed to support business expansion, including new premises. Some also borrowed to invest in property, including housing as a form of pension. Then the roof fell in. Domestic demand collapsed because of the crisis and due to a misconceived obsession with austerity. Profitability and cashflow dried up.

Many SMEs are now trying to finance large borrowings at a time when trading conditions have never been more pressurised. That’s only the half of it. Many of these same businesses are carrying residential mortgages that have much less value as collateral and which they can barely, if at all, sustain: There is much less coming in to, and so much going out of, the family exchequer.

The Central Bank has been pressurising banks to crystallise, and to make adequate provisions, for impaired SME loans. It has pushed the banks to improve their monitoring systems, to restructure some SME loans, and to set targets for lending to SMEs.

The banks say they are deleveraging their loan book and reducing their dependence on official financing. They say they are seeking to pay down Government funding and, at the same time, under pressure to strengthen their capital position. They also claim they are lending to SMEs and have put dedicated SME capabilities and skilled staff in place.

Simultaneously they are trying to play to international investors and shareholders by increasing their net interest margin

Net interest margin and fees/charges — but this can only be done by extracting more income from an already stressed economy, including SMEs. Ireland’s banking system is conflicted by different and potentially conflicting priorities.

SMEs point out that, compared with larger companies who have options, they have always faced much greater difficulties in getting credit on a non-punitive basis. But they also point out — and the governor of the Central Bank made the same point last year — that compared with virtually all other eurozone countries, SMEs in Ireland face even more acute difficulties, in terms of access to, and pricing of, credit.

Some also point out that banks appear to be primarily interested in lending to ‘safe’ SMEs whereas the real difficulties in the present environment are faced by SMEs that are not ‘safe’ — they are hanging on and have the kind of risk-profile that banks do not easily entertain these days. They point out that the level of declines are higher in Ireland than in other eurozone countries and that it’s too costly and too complicated for many businesses to even bother trying. Again, there is strong evidence that declines are higher in Ireland than in other countries.

Indeed, some SMEs are themselves having to act as ‘banks’ by extending trade-credit to companies turned down by banks. The case was made in these pages some time ago for a loan guarantee scheme to mitigate the risk premium faced by SMEs struggling to keep afloat. The Government has introduced something along these lines. But for many SMEs the bar appears to be set at a near impossible level.

However, in all of this there is an even deeper issue that is frequently overlooked. It is the cost in time, money, and pressure, of the burdens imposed on SMEs by the State itself. This is more than the red tape issue much discussed by the European Commission and Parliament. The administrative and compliance burden imposed on SMEs in the most savage recession in modern Irish history is an enormous discouragement and a real impediment to growth. The Government points to schemes addressing red tape: This is not convincing.

The stealth charges imposed by the Government, local authorities, and councils — the interventions by all kinds of agencies, the finicky regulations — and an insatiable appetite for extracting more, represents a dead weight that is suffocating many businesses. They come on top of the whole credit debacle. All around SMEs, charges increase and multiply. The employer’s redundancy rebate has been abolished, putting more pressure on already pressurised employers — the additional sales to absorb these charges are simply not there.

All of this is far from the intent of the minister who knows the research and is genuinely committed to doing his best for business and for the long-term unemployed. But budgetary policy is still fixated on what is euphemistically called fiscal consolidation, even as the theoretical basis for this approach has collapsed and commissioner Olli Rehn (predictably) postpones fiscal consolidation for France and Italy. Ireland struggles under a bigger burden than does France.

At the most fundamental level, these pressures on SMEs reflect a mindset characterised by distrust and a lack of respect for the fruits of the hard work, worry, sacrifice — the ‘sweat-equity’ of SMEs who put bread on the national table in these most difficult of times. The irony is that all of these costs and impositions actually undermine the efforts of some state agencies to support SMEs.

Essentially small companies have a very clear perspective: They want the Government to get off their back and make it easier to do what they do best: Grow their company and employ people, and be rewarded for this. That means having reasonable access to credit on reasonable terms.

These deeply negative forces, in aggregate, will — unless dealt with — impel Ireland towards a second bailout. They are further exacerbating the nihilistic austerity of troikanomics. These forces will capsize any nascent recovery.

The way forward is to re-imagine these burdens as borne by SMEs, alongside a 2014 budget that finally acknowledges that Ireland can think for itself and that only productive growth and jobs will extricate the economy from a darkness to which we have become desensitised.

Attracting and anchoring foreign direct investment is vital — but many of these companies have options, and the Government knows this. What SMEs are seeking is the means to help them survive these times and to play their role in recovery.