Business News

GUEST BLOG: Tackling SME financing issues

By Business & Finance
22 June 2016
money Chris Potter

By Marc O’Dwyer, CEO of Big Red Cloud

The Government’s inaction around the SME lending challenges currently faced in Ireland cannot be ignored.

The Irish Government can’t but recognise that SMEs are facing huge and often insurmountable challenges when it comes to accessing finance, due to the large body of research that supports the contention released in recent months, but they have done little to alleviate the issue.

Irish SMEs are bearing the brunt of an Irish banking sector that continues to gouge SMEs as it climbs the recovery ladder following the banking crisis in 2008.

Nowhere is this more evident than in the analysis carried out by the National Competitiveness Council. The figures make for some pretty damning evidence: Irish SMEs borrowing up to €250,000 are paying 80% more for those loans than their eurozone counterparts.

This on top on anecdotal evidence which reveals that, despite official numbers from the banks, it is still very difficult for an SME with a viable business plan to receive funding from the pillar banks.

We believe that these funding issues are putting competitive pressure on Irish SMEs. In the most recent update from the Credit Review Office, it was reported that 37% of the formal appeals it completed resulted in an overturn of the bank’s decision.

Irish banks are looking to recover their loans from distressed loans and mortgages in whatever way they can, and SME loans are clearly in the firing line for overpriced credit when they will actually give it. Given the lack of easily available credit options, SMEs don’t have the luxury of shopping around and getting better rates.

Overall, this indicates a complete lack of competition, thus driving up the cost of credit for SMEs. In theory, SMEs could go to other eurozone countries to access cheaper credit, but in practise, European banks are hesitant to lend to Irish companies given our economic past.

PAYMENTS SERVICES DIRECTIVE

The upcoming Payment Services Directive 2 (PSD2), which comes into force across the eurozone in 2016, will force all banks to open up their customer transactional data to any system wanting to connect to it with the customer’s authorisation.

In addition, it will open up new payment mechanisms linked directly to customer’s accounts, accessible by properly authorised third-party services and apps.

The Government must be reminded of its elected responsibility to the 190,000 small businesses in Ireland that employ nearly 1.3 million people

This represents a dramatic change in the business for banks. It will further reduce the banks revenues from payment processing and account management. It will also dramatically change how lending will work. With easy and guaranteed access to banking transactional data, lenders will be able to make better lending decisions, and this may seed new entrants to the market.

If the traditional banks are not ready for this new world, they may well re-trench into their most profitable business banking area, that of lending. There is a risk therefore that the price differentials on loans will continue, unless new entrants can start to shake up what is a very un-competitive market at the moment.

DISPARITY

Recent results of the 2014 CSO Access to Finance Survey also shows the disparity that exists between those SMEs 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.

We recently carried out a recent survey of our SME customer base in which the vast majority of respondents cited lack of pointed to Government-controlled issues of taxation, regulation & compliance and a general lack of Government support as the key impediments to job-delivering growth.

What we’ve long recognised at Big Red Cloud from talking to our customer base, is that micro and small businesses in Ireland face an uphill struggle when it comes to raising bank finance.

What the Government has long neglected to do is to alleviate the dependency on the very limited bank finance by introducing more reliant support and tax break schemes.

The banking sector was anaemic towards most business lending for the best part of the last eight years and during that time the Government really should have stood up to the plate and introduced the necessary measures.

The Government must be reminded of its elected responsibility to the 190,000 small businesses in Ireland that employ nearly 1.3 million people.

Photo (above): Chris Potter

About the blogger

Marc O'Dwyer Big Red CloudCEO of Big Red Cloud, Marc O’Dwyer is an Irish entrepreneur who, in 2001, bought the majority share in a small Irish software business, Big Red Book.

Marc then acquired a payroll company to compliment Big Red Books Accounting products.

He launched Big Red Cloud in June 2012, the online version of Big Red Book, to date the company has successfully converted 54% of trials into sales and the number of customers is growing rapidly. Marc continues to run both Big Red Book, which now supports 35,000 businesses, and Big Red Cloud.

He is a very keen sportsman, having played rugby for 20 years and has competed in nine marathons and several triathlons. He has also completed four Ironman races in Austria, Frankfurt and Nice.