Finance for SMEs: Restarting the engine ..

Few doubt that small firms, the backbone of local communities, have been hit hard by the credit crunch. Many firms which would be viable when viewed from a long term perspective, have been forced prematurely to the wall, having been cut off at the knees by newly risk averse, cash strapped banks.

Crunching Hard and Deep
The accountancy group Mazars, has carried out a series of studies on credit availability.
The latest review, published in mid April, indicates that while we have entered a period of stabilisation, the crisis remains very real.
According to a statement issued by Ian Talbot, CEO of Chambers Ireland:
“We note with concern that 35% of all loans granted to SMEs are now behind on payment. This figure is likely to act as deadweight on future loan applications and approvals, particularly when demand for credit picks up as the cycle improves. This underscores the need for additional measures to support viable firms accessing credit. Specifically, the Government must respond now to help the upswing via an Irish equivalent of the UK’s Enterprise Funds Guarantee Scheme.”
The small business lobby group, ISME, has expressed greater scepticism about the figures supplied by Mazars than the other business lobby groups.
ISME argues that Mazar’s figures underestimate the levels of informal rejection of loan applications.
The organisation’s chief executive, Mark Fielding, is also pressing for the establishment of a State backed guarantee scheme, though he is not optimistic that one will be put in place, in the short term.

Credit Review Office
“We are in the credit clearing committee working with the new Credit Review Office Head, John Trethowan. We are doing a lot of work with the Departments of Finance & Enterprise.. there is a major battle with Finance which views the proposal as yet another guarantee for the banks..”
Fielding believes that putting a guarantee in place for SME lending would have the effect of “pushing borderline loan application cases across the winning line..”
ISME is a thirty two county organisation. It has members who are benefiting from the UK’s State guarantee scheme. Indeed, many firms in the Republic are as a result operating at a disadvantage when compared with rival firms across the Border.

Trethowan’s new credit review scheme is getting up and running. Trethowan can offer recommendations, but he cannot force the banks to lend.

Concern is also being expressed that the Government may interfere to direct funds towards identified growth sectors. This has drawn criticism in media circles, with fears of a credit bubble in favoured sectors while many worthwhile, but less fashionable businesses lose out.

Not just cash – Bankers need to learn again how to lend…
ISME has also been doing a lot of work with the banks on trying to put together lending arrangements. Mark Fielding says “We are doing a lot of work with the top guys, but we are also finding that guys in the branches and even the regional offices do not have the expertise when it comes to lending to business. One of the difficulties is that the older bankers, who understood balance sheets, have left the banks on early retirement.”
Many younger lenders, reliant on ever rising property values, never developed the necessary lending skills. A process of educating staff in such skills is underway, but it will not achieve results in the short term.
“There has been a massive collapse in standards.”

New Initiatives…
Certainly, efforts are being made to address the needs of start ups. Bank of Ireland recently launched a €26M Seed and Early Stage Equity Fund while AIB has launched a €79m seed fund .
According to Niall Olden of BoI :
“We are backing companies that are primarily intellectual property driven. These are, to a large extent, independent of the Irish economy.. they are not sensitive to currency fluctuations.”
Sean Murphy of Chambers Ireland believes that the Business Expansion Scheme should be broadened in scope: he argues that what firms need is an expansion in their equity base side by side with any expansion in credit.
He points out that last year, just six hundred firms participated in the BES . He does not see why this could not be broadened out to six thousand.
The downturn has greatly complicated the process of raising funds under the BES, as many of the army of investors find themselves either under financial strain, and/ or increasingly risk averse.

Government intervention, either directly through aid and loan guarantees, or indirectly through the use of fiscal incentives (assuming EU approval) would surely pay for itself, given the proven role of SMEs as a generator of self

balance sheets, have left the banks on early retirement.”
Many younger lenders, reliant on ever rising property values, never developed the necessary lending skills. A process of educating staff in such skills is underway, but it will not achieve results in the short term.
“There has been a massive collapse in standards.”