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Ireland needs more backers to get 'skin in the game' for business to grow

Owner-operators are far too dependent on banks for finance… and it’s getting worse.

BANKS HAVE BEEN opening up the purse strings to cash-poor owner-operators, but the small business sector desperately needs more investors to fuel their growth next year and beyond.

But Irish small and medium enterprises (SMEs) are becoming even more dependent on the big banks for their capital needs in a market which has been stripped of most of its competition during the recession.

The latest Red C SME credit demand survey also showed the loan rejection rate had decreased significantly – down to 17% either partially or completely refused, compared to 22% for the same period last year and 30% in 2012.

Bigger businesses were more likely than small companies to be successful, according to the survey, which covered the 6 months from April to September.

SME loans Source: Red C SME credit demand survey

Meanwhile, the latest “bank watch” survey from the Irish Small and Medium Enterprise Association (ISME), found the demand rate, which measures the share of SMEs that tried to boost their borrowing during the period, was at a 5 1/2-year high.

Weaker businesses lost in “cull”

ISME chief executive Mark Fielding told part of the reason for the upturn in successful applications was simply because there had been “a cull” of many less-viable traders during the recession.

ISME AGMS ISME chief executive Mark Fielding Source: James Horan/Photocall Ireland

“Some of the ones that would have been looking for funding in the past have been taken out of the equation just by attrition,” he said.

But Fielding said the lack of competition in the lending market, which was already a problem during the Celtic Tiger years, was now even worse despite the economy and borrowing demand picking up again.

If you didn’t have enough back then and some of the lenders have left, then you definitely don’t have enough now. At the moment we have, in reality, 2 1/2 banks lending to SMEs.”

The Red C poll also revealed the overwhelming majority of SMEs relied on the two remaining pillar banks – AIB and the Bank of Ireland – for their financing.

Red C Source: Red C SME credit demand survey

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More investors needed, not bank competition

Felix O’Regan, from the Banking & Payments Federation Ireland, which represents all the country’s major lenders, said the issue was not about competition – it was the need for SMEs to have more options from financiers willing to get some “skin in the game” as investors.

“All of the research shows that SMEs in Ireland are overly dependent on banking for their finance,” he said.

It’s not a question about pillar banks and non-pillar banks, it’s a question about their being sufficient sources of equity finance for SMEs as they expand.”

Fielding agreed Irish SMEs had traditionally been far too reliant on bank funding and hopefully options for peer-to-peer lending and investment finance would become more viable in 2015.

He said the government could start by offering similar tax breaks for business investors to those dangled in front of property investors for many years.

All this month, as part of’s ongoing SME focus, we will be looking back on 2014 – and throwing forward to 2015 – for the small-business sector.

Originally published at 7.15am

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About the author:

Peter Bodkin  / Editor, Fora

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