|Bank of Ireland was founded in 1783 and the premises at College Green, Dublin, of the Irish Parliament, which became defunct on the Act of Union coming in to effect in 1801, were purchased for £40,000 in 1803.|
New research that will be presented today in Dublin shows that Irish firms are over-dependent on banks and are slow to adopt newer financial products, such as crowdfunding and peer-to-peer lending.
The ESRI (Economic and Social Research Institute) will hold a half-day conference Friday focusing on the bank and non-bank financing environment of SMEs in economic recovery. The research presented aims to contribute to a policy environment that facilitates a smooth recovery in the SME sector.
The event will include presentations on the empirical patterns determining SME financing structures in Ireland and Europe and evaluation of international and domestic evidence on the appropriate policy response to SME funding challenges.
Speakers will include: Annalisa Ferrando (European Central Bank), Tara McIndoe-Calder (Central Bank of Ireland), Conor O’Toole (ESRI) and Martina Lawless (ESRI).
"Financing SMEs in Recovery,” to be opened by Simon Harris, minister of state at the Department of Finance, will examine how Irish Small and Medium Enterprises (SMEs) currently fund themselves, and how policy can increase the diversity of financing used by firms. Currently, Irish firms are highly reliant on banks as their main source of external finance, with less formal sources, such as trade credit, also used frequently. The SME sector in Ireland is a major employer, accounting for close to 70% of employment.
Dr Martina Lawless of the ESRI said “Irish firms continue to look mainly to banks when seeking external financing, leaving them vulnerable to credit constraints. Encouraging firms to access the broader set of potential funding sources would provide a more robust financing environment for SMEs and support growth and investment. There are a range of novel funding options, such as crowdfunding, that just are currently overlooked by many companies”.
The research presented will draw on Irish and cross-European surveys of firm financing to examine the current mix of finance sources used by SMEs including the Department of Finance’s biannual credit demand survey. Some of the key findings and policy implications from across the research papers to be presented are:
- Irish firms are highly reliant on banks as the main source of external finance. There is very limited use of formal sources of non-bank debt such as issued debt or mezzanine financing.
- Less formal sources such as trade credit (from suppliers and/or customers) and family or business loans are used frequently.
- The use of newer sources of financial products, such as crowdfunding and peer-to-peer lending, is fairly limited in terms of the number of firms using them. They tend to be used most by firms in the ICT sectors and by innovative firms more generally and hence have the potential to play an important role in financing SME growth in these areas.
- In terms of equity financing, we find that, looking across Europe, Ireland has the second highest rate of firms either currently using equity or indicating that it is relevant to their operations. Equity usage is higher amongst larger firms. For SMEs operating in sectors driven more by domestic demand, equity financing is more likely to come from friends and family or other business partners than venture capital type arrangements.
- Expected credit demand of Irish SMEs is estimated to remain relatively stable at its current level of €57bn over the near term, with total credit to non-financial firms (including larger firms) returning to its long-run average of equivalent to 40% of GDP. At a sector level, the research finds a reduction in the dominance of property lending accompanied by expansion of credit in other sectors.
- Looking at the characteristics of firms applying for bank credit across Europe, results show that borrowers’ responses are in line with expectations - - they are more discouraged when the average interest rate charged by banks is higher, when the potential return on investment is lower, and when the application costs and opportunity costs of bank lending are higher. Overall, discouraged borrowers tend to be relatively more risky firms with a higher likelihood of credit rejection than those firms that do make formal applications to banks.
Policy Implications of the Research
- Moving firms towards a more diversified set of financing options involves long-term, structural change to make a broader range of products available and to encourage firms to make use of them. Some existing policy interventions such as the Supporting SMEs online tool (www.localenterprise.ie/smeonlinetool) that apply broadly across all of the financing types involve increasing awareness of the different sources of finance available and providing information to increase familiarity with the diverse range of options available.
- On the investor side, active promotion of opportunities for investment in local businesses would build greater awareness of these options.
- The policy analysis also suggests that efforts should be made to ensure that the costs associated with legal procedures and financial disclosures do not operate as obstacles in accessing new sources of finance.
- Finally, the analysis suggests that funding supports should be reviewed regularly to ensure that they continue to be necessary and to meet market needs.