One in five Irish SMEs given no reason for bank loan refusals

Irish SMEs are hugely reliant on bank finance given the lack of other available options while close to one in five businesses refused finance were given no explanation for the decision, new research shows.

Bank lending is close to 15 times more popular than equity finance among small firms and more than four times as prevalent as other types of finance.

Figures compiled by the Central Statistics Office (CSO) examining SMEs’ access to credit throughout 2014 shows larger SMEs and those which export a greater proportion of their goods and services are more likely to be granted funding.

Faster growing businesses were also more likely to be successful in their application with those classed as high growth enterprises securing finance in seven out of ten cases compared to less than 50% of the time for other SMEs.

“The results of the 2014 CSO Access to Finance Survey shows the disparity that exists between those SME’s that are export focused and those that serve the local economy. The survey reports that almost 95% of exporting SMEs were successful compared to just 67% of non-exporting SMEs.

“The micro and small business sector was further disadvantaged as almost 92% of medium-sized enterprises were successful compared to just below 70% of micro-sized enterprises,” chief executive of online software firm Big Red Cloud, Marc O’Dwyer said.

The Irish lending landscape has long been considered far too dependent on bank finance given the dearth of over options.

Recent analysis by the Irish Examiner showed that not only are the range of options available to SMEs here worse than those elsewhere but that Irish firms are paying twice the eurozone average for credit and are faced with the highest interest rates in the currency union.

The European Commission was highly critical of the situation in its country report earlier this week.

“The concentrated SME lending market translates into higher interest rates than the euro area average. The Irish SME lending market effectively remains a duopoly,” the report read.

Despite non-bank financing options such as equity financing, crowdfunding and venture capital having been encouraged by government in the past few months the Commission found they “do not yet seem to be replacing bank credit in a significant way”.

The report also pointed to a lack of expertise and excessive risk-averseness on behalf of banks resulting in higher rejection rates.

Firms have also highlighted banks’ frequent demands for additional personal guarantees on SME lending, especially for younger and more innovative companies.

Close to a fifth of firms whose applications for finance were refused were given no reason for the bank’s decision, according to the survey.

The next most common responses from banks were the company’s lack of capital (16.8%); holding too much existing debt (15.9%) and the investment being seen as being too risky relative to the firm’s potential (12.6%).

More than half of SMEs applying for finance during 2014 needed the funds as working capital while nearly 40% of applications were for other types of finance.

“The banking sector was anaemic towards most business lending for the best part of the last 8 years and during that time the Government really should have stood up to the plate and introduced the necessary measures,” Mr O’Dwyer added.