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'The banks are not lending' belief is stopping SMEs applying for loans

The latest report by the ESRI says accessing finance is the third most reported problem facing small businesses in Ireland.

THE LATEST ESRI Quarterly Economic Commentary shows that one in nine Irish SMEs didn’t bother applying for a loan because they thought they’d be rejected or they were refused loans because of the line of business they are in.

Access to finance is the third most reported problem facing firms in Ireland between 2009 and 2011. In mid 2012, 21 per cent of businesses said it was a problem, this jumped to 24 per cent between October 2012 – March 2013.

Figures show that 61 per cent of businesses didn’t apply for credit at all. Reasons for not applying include that firms didn’t need funding, they would prefer not to borrow or because the did not feel they would be successful.

The ESRI is concerned that businesses are not applying for loans because of their “belief that the banks are not lending”. The report states:

Irish SMEs have traditionally been heavily reliant on bank-based lending… bank credit is the most important source for Irish firms. Given the scale of  the decline in the domestic economy, it is pertinent to evaluate both the reasons  for not applying as well as the outcome of applications to get a sense of both credit supply and demand sides.

Of the 39 per cent of firms that did apply for credit, 56 per cent were completely successful. A further 4 per cent were partially successful and 19 per cent were rejected in full.

Credit rationing

The ESRI say they are concerned about the later group, particularly in what is known as “credit rationing”. This is when a firm is denied finance because it is the bank’s policy not to invest in certain sectors. The report shows that younger business are the most credit rationed.

Businesses between 11 and 20 years old appear to be the largest group that are discouraged from applying for a loan due to having “no trust in banks; believe banks not lending; possible or fear of rejection or because the procedure too difficult or slow/too many terms and conditions”.

Acting Small Firms Association Director (SFA) Avine Mcnally told TheJournal.ie that their research shows that one in four small businesses can’t get access to finance from the banks.

Certain sectors would have more difficulty than others in getting credit and when they are refused there is a lack of clarity as to why their application was been turned down. The time frame in which credit is approved or denied is also a problem.

The banks are not as pro-risk as they used to be, but there are still many viable businesses out there that need support and financing.

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