Description
This report presents the results of a study into access to finance for growth amongst SMEs in Ireland and Northern Ireland.
ACCESS TO FINANCE FOR GROWTH FOR
SMEs ON THE ISLAND OF IRELAND
December 2013
List of figures 4
List of tables 6
Acknowledgements 7
Foreword 9
1 Executive Summary 10
1.1 Key Findings 10
1.2 Recommendations 14
2 Introduction 21
2.1 Objectives of the Study 21
2.2 Definitions used in the Study 21
2.3 Report Structure 22
3 SME Lending Context 24
3.1 The Importance of SMEs to the Economy 24
3.2 Economic Context 25
3.3 SME Business Performance 31
3.4 SME Business Concerns 35
3.5 How SMEs are Financing their Businesses 38
4 Demand For Finance 44
4.1 Demand for Finance 44
4.2 The Bank Application Process, Procedures and Criteria 67
4.3 Demand for Non-Bank Finance 70
5 Supply of Finance 75
5.1 Overall Supply of Finance 75
5.2 Supply of Bank Finance 76
5.3 Supply of Equity Finance 83
5.4 Supply of Public Finance 93
5.5 The Funding Landscape 96
5.6 Sources of Finance 97
6 International Best Practice 100
6.1 Introduction 100
6.2 Diversifying Financing and the Promotion of Alternative
Financing Options/ Non Bank Lending 100
6.3 Improving financial capability through awareness of financing schemes
and targeted support to SMEs seeking Finance 102
6.4 Improving information on SMEs and Finance 107
7 Conclusions and Recommendations 108
7.1 Conclusions 108
7.2 Recommendations 113
APPENDICES:
1. Funding landscape map – Ireland 124
2. Funding landscape map – Northern Ireland 125
3. Assumptions used in compiling supply side data 126
4. List of consultees 127
Contents
3
Figure 1: SME Size Split 24
Figure 2: SME Profile – Number and People Employed 24
Figure 3: Employee Share of Total SME Employment by Business Sector 25
Figure 4: Impact of Economic Downturn 26
Figure 5: Components of Irish Economic Growth (GDP) 1996-2012 27
Figure 6: Exporting Profile 28
Figure 7: Irish Domestic Banks? SME/Corporate Lending, Impaired and Vulnerable Loans 2012 30
Figure 8: Irish Domestics Banks? Flow of Impaired Loans as a Percentage of Outstanding Lending 2012 30
Figure 9: Sales Performance in Ireland and Northern Ireland 31
Figure 10: Employment Performance in Ireland and Northern Ireland 32
Figure 11: Profit in the Business in the Last 12 Months 32
Figure 12: Current Status of the Business. 33
Figure 13: Current Status of the Business by Sector 34
Figure 14: SME Constraints on Business Growth Plans 35
Figure 15: Current Issues for SMEs in Business. 36
Figure 16: SAFE Survey Euro Area SME Business Issues 37
Figure 17: SAFE Survey Euro Area SME Business Issues – Country Comparison 37
Figure 18: SMEs with Some Form of External Finance in Place 38
Figure 19: Types of Finance in Place 39
Figure 20: Sources of Finance – Ireland v EU Average 39
Figure 21: SMEs with Grants in Place 40
Figure 22: Sectoral Profile of SMEs with Grants in Place 40
Figure 23: Cashflow as an Issue for the Business 41
Figure 24: Working Capital Management – Changes in Receipts from Customers 42
Figure 25: Working Capital Management – Changed in Payments to Suppliers 42
Figure 26: Cheque Usage in Europe 43
Figure 27: The Funding Journey 44
Figure 28: Bank Approval Rates 2007 v 2010 45
Figure 29: SME Demand for Finance per Department of Finance SME Demand Surveys 46
Figure 30: Changes in Credit Demand 47
Figure 31: SME Demand Profile 48
Figure 32: Lending Products Requested by SMEs - InterTradeIreland 49
Figure 33: Lending Products Requested by SMEs – Department of Finance 49
Figure 34: Goods/Commercial Vehicles Licenced for the First Time 50
Figure 35: Demand by Business Sector – InterTradeIreland 50
Figure 36: Demand by Business Sector (Ireland) – Department of Finance 51
Figure 37: Likelihood of Requiring Finance in the Next 12 Months 52
Figure 38: Purpose of Finance Applied For 52
Figure 39: Purpose of Application by Product 53
Figure 40: Purpose of Finance Applied by Business Status 54
Figure 41: Demand by Business Purpose (Investment – v- Working Capital) 54
Figure 42: Enterprise Births and Deaths on the Island of Ireland 56
List of Figures
4
Figure 43: SME Bank Relationship 56
Figure 44: SME Perception of Bank Lending Practices 57
Figure 45: Business View Lending to Irish SMEs in the Last Six Months 58
Figure 46: Central Bank Research on SAFE Surveys 59
Figure 47: Changes in Credit Standards on Loans to Enterprises 60
Figure 48: Businesses Considering Applying for Finance but Deciding Not to Proceed 60
Figure 49: Reason for Not Proceeding with Application for Finance 61
Figure 50: Property Purchased by Company Since 2005 using Bank Debt 62
Figure 51: Relevance of Property Debt in Consideration in Raising New Finance for Business 62
Figure 52: Missed Repayments on Existing Bank Credit Facilities by Sector 64
Figure 53: SMEs Avoiding Approaching their Bank in Case They Try to Restructure Existing Credit Arrangements 65
Figure 54: The Outcome of Applications for Finance 65
Figure 55: SMEs Perception of Banks Understanding their Business 66
Figure 56: How Businesses Rate Their Abilities 68
Figure 57: Demand for Non-Bank Finance 70
Figure 58: Awareness of Public Finance Schemes 74
Figure 59: Total Bank Lending to SMES (Exposure) - Euro 78
Figure 60: Employee Share of Total SME Employment by Business Sector 78
Figure 61: Outstanding Credit (Exposure) Share of Total SME Credit by Business Sector 78
Figure 62: Outstanding Credit (Exposure) Share of Total SME Credit by Business Sector, by location 79
Figure 63: Credit Advanced to Irish Resident Small and Medium Sized Enterprises (Ireland only) 82
Figure 64: Credit Advanced to Irish Resident Small and Medium Sized Enterprises (Ireland only) 82
Figure 65: Island of Ireland Equity Landscape 84
Figure 66: Angel Funding in Ireland and Northern Ireland (Combined) 87
Figure 67: Equity Raised through BES/EII/SCS in Ireland 88
Figure 68: Business Sector Analysis of Equity Funding - 2012 89
Figure 69: Detailed Business Sector Analysis of Equity Funding - 2012 89
Figure 70: Sector Focus of Publicly Funded Schemes (Ireland) 94
Figure 71: Sector Focus of Publicly Funded Schemes (Northern Ireland) 95
Figure 72: Profile of Government Funding 96
Figure 73: Sectoral Profile of all SME Products/ Schemes 98
5
6
Table 1: Total Supply of Funding to SMEs 75
Table 2: Total Bank Lending to SMEs (exposure) 77
Table 3: Value of credit requested 80
Table 4: Approval Rates by product 80
Table 5: Average Formal Credit Application Value - Total 81
Table 6: Average Formal Credit Application Value - Core Business Lending 81
Table 7: Total Estimated SME Equity Finance 83
Table 8: Northern Ireland Equity Funds - 2012 86
Table 9: Geographical Focus of Equity Funds 92
Table 10: Investment Trend by Jurisdiction of Investee Company 92
Table 11: SME Funding Providers and Schemes 98
Table 12: UK Channel / Source of Finance 102
Table 13: Awareness of access to finance initiatives 103
Table 14: Barriers to take-up and use of Business Support 104
Table 15: International Business Development Services 105
List of Tables
7
InterTradeIreland would like to thank the individuals who agreed to be interviewed
for the research and the companies who participated in the survey. We would also
like to thank the steering group members who provided very important insights
and direction to the research.
Steering Group:
Aidan Gough InterTradeIreland (Chair)
Páraig Hennessy Department of Jobs, Enterprise and Innovation
Aidan McMahon Department of Enterprise, Trade and Investment
Fiona McCausland Department of Enterprise, Trade and Investment
Gráinne Lennon InterTradeIreland
Eoin Magennis InterTradeIreland
Johann Gallagher Strategic Investment Board (NI)
Adrian Devitt Forfás
Allen Martin Invest Northern Ireland
Donnchadh Cullinan Enterprise Ireland
Anthony O?Brien Irish Banking Federation
Bob McGowan-Smyth Crescent Capital
Debbie Rennick Irish Venture Capital Association/ACT Capital
Drew O?Sullivan InterTradeIreland
Nigel Smyth Confederation of British Industry
Wilfred Mitchell/Roger Pollen Federation of Small Businesses (NI)
Patricia Callan Small Firms Association
Mark Fielding Irish Small and Medium Enterprises Association
Seán Murphy Chambers Ireland
InterTradeIreland acknowledges the background research provided by Mazars and Perceptive Insight. Further work
has been undertaken by InterTradeIreland staff, Aidan Gough and Eoin Magennis.
Disclaimer
InterTradeIreland is confident that the information and opinions contained in this document have been compiled or arrived at by the authors from
sources believed to be reliable or in good faith, but no representation or warranty, express or implied, is made to their accuracy, completeness or
correctness. All opinions and estimates contained in this document constitute the authors? judgement as of the date of this document and are subject to
change without notice. The publication is intended to provide general information to its readers regarding the subject matter of the publication. It is not
intended to provide a comprehensive statement of the subject matter of the publication and does not necessarily reflect the views of InterTradeIreland.
While care has been taken in the production of the publication, no responsibility is accepted by InterTradeIreland for any errors or omissions herein.
Acknowledgements
8
9
There are approximately 300,000 small and medium sized enterprises (SMEs) on the island of Ireland. These
enterprises have a disproportionate reliance on the banking sector for their external financing needs. The well-
documented distress experienced by that sector has had a powerfully disruptive influence on the wider economy. This
has had a particularly negative impact on the market for finance, the proper functioning of which is a prerequisite of a
growing economy.
The primary aim of this report is to provide, for the first time, a reliable indication of the supply of finance for
businesses across the island. More specifically, the report fills the gap that has been caused by the unavailability of
supply-side data for the Northern Ireland market. Using, as far as possible, the same methodology as is used in
Ireland, we estimate that, in total, bank funding to SMEs in Northern Ireland in 2012 amounted to £4.7bn. It is
important for policy makers that this figure is available on an annual basis as this informational deficit seriously
curtails their ability to respond to the needs of Northern Ireland?s SME community.
The fracture in the relationship between banks and our SME community, while leaving a considerable problem in
terms of property debt and bank recapitalisation, has also revealed a serious number of defects in the wider financial
ecosystem that supports the needs of growth-focused SMEs. This report seeks to widen the debate from an
important but narrow focus on the supply of and demand for bank finance to a broader, more comprehensive
discussion on the availability and use of appropriate financial instruments to support and drive growing SMEs. The
need to broaden the diversity of lending options accessible to SMEs has become even more urgent, particularly in
Ireland where the banking sector has become extremely concentrated with the withdrawal of several foreign-owned
banks.
In both Ireland and Northern Ireland there is a disproportionate reliance on short term financing options, particularly
overdrafts, which in many instances are not the best vehicle to finance growth strategies. It is important not just to
widen the availability of more suitable funding options, creating a more sophisticated and diverse financial ecosystem
across the island but, just as crucially, to ensure that businesses are aware of their options and informed about their
choices.
The recommendations therefore address two key areas: information and financial capability. They are consistent with
and designed to support and perhaps accelerate work already ongoing in both jurisdictions by improving the
likelihood that the financing product sought is the most appropriate match to the SMEs needs.
Foreword
This report presents the results of a study into access
to finance for growth amongst SMEs in Ireland and
Northern Ireland. The study aims, for the first time, to
examine not only bank finance but finance available to
SMEs from other sources such as government funding,
venture capital and angel finance.
The study uniquely presents a complete picture of the
supply of finance to SMEs across the island of Ireland,
in particular the supply of bank finance in Northern
Ireland. In Ireland, banks provide supply-side data to
the Central Bank of Ireland. However, at present, no
such process exists within Northern Ireland. This study
provides the first analysis of the total value of the credit
extended by banks in 2012 to SMEs in Northern
Ireland. This study is an important component in the
complete and rigorous assessment of the current
supply and demand side issues related to bank and
non-bank finance for SMEs trading in Ireland and in
Northern Ireland.
The key findings and recommendations are
summarised below.
1. KEY FINDINGS
IMPORTANCE OF UNDERSTANDING
THE LENDING CONTEXT FOR SMES
• Demand is at least as important, if not more
important than supply, as the key SME finance
issue. The data gathered for this report shows that
demand for credit is currently at its lowest level since
2010, as measured by applications for credit by
SMEs. In addition, businesses say that the supply of
finance is no longer the most significant issue facing
them, with finding new customers and/or addressing
cost pressures now cited as their most significant
challenge. However, a concern remains that, when an
economic recovery begins to gain momentum, it
could be inhibited or even derailed by a supply-side
deficit.
• There is a dearth of diversity in the financing
landscape for SMEs across the island. The capital
structures, market and economic position of SMEs on
the island have a disproportionate reliance on banks
for their funding needs. Bank funding, largely in the
form of overdrafts and loans, accounts for 94% of
total SME finance which is comfortably greater than
other European counterparts.
• A general lack of financial literacy exists across
the broad financing landscape. A lack of knowledge
on alternative funding options is inhibiting the
development of a more diverse funding panorama for
SMEs and the subsequent use of more appropriate
and less costly funding alternatives. Not only is there
an over-reliance on bank funding but local SMEs are
also more reliant on short term finance, in particular
overdrafts and trade credit, in comparison to the EU
average. They also still have a significant
dependency on cheques rather than funds transfer or
other payment methods.
• There is a lack of balance sheet “right sizing”. In
general, Irish and Northern Irish banks need to be
more engaged in the debt restructuring or write off of
debt for SMEs who demonstrate sustainable trading
positions but are over-leveraged due to property or
other legacy debt issues. Banks are only very slowly
disengaging from short term forbearance measures,
a temporary and short term solution which, in the
absence of strong economic growth, may not address
the need for long term restructuring of the balance
sheets of many SMEs. A sustainable SME whose
debt has been “right sized” to a level which they can
service is a better asset to both the bank and wider
economy.
• A lack of investment is potentially damaging
SMEs businesses. The economies of Ireland and
Northern Ireland are both heavily dominated by
SMEs, particularly micro companies with low levels of
turnover, employees and a domestic economy focus.
While there are encouraging signs that more firms
are moving to a growth mode, a still significant
proportion of SMEs are focussed on survival or
stabilisation not on growth or expansion and, as such,
are not looking for growth or development capital
from any finance source. A lack of investment in a
business ultimately damages that business and
therefore represents a systemic and long term risk to
the economies of Northern Ireland and Ireland.
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1. Executive Summary
• There is a continued need to leverage EU-wide
and UK initiatives. Both Ireland and Northern Ireland
have been successful in drawing down support under
EU measures. Ongoing engagement with the EU will
remain an important aspect of SME policy to ensure
maximum potential is derived from the range of
available EU funding initiatives, such as the
Competitiveness and Innovation Programme,
JEREMIE and the European Investment Bank. With
regard to UK initiatives the authorities in Northern
Ireland remain concerned to ensure that regional
needs are addressed and responses can be tailored,
in order to ensure maximum benefit from the
Enterprise Finance Guarantee Scheme and the
Funding for Lending Scheme.
SUPPLY OF AND DEMAND FOR
FINANCE FOR GROWTH
Bank Finance
• The report provides, for the first time, a picture of
total supply of bank finance for both Ireland and
Northern Ireland. As at 31st December 2012 total
bank finance of €31.5 / £25.7 billion had been
extended to Irish and Northern Irish SMEs. Of this
total €25.7 / £20.9 billion is to Irish SMEs and €5.8 /
£4.7 billion to Northern Irish SMEs.
• Businesses are over-reliant on bank funding. As
at 31st December 2012 94% of total SME finance for
both Irish and Northern Irish SMEs came from bank
funding. In comparison to European SMEs, Irish and
Northern Irish SMEs demonstrate an overreliance on
short term bank finance with a disproportionately high
use of overdrafts.
• A lack of bank supply data exists for Northern
Ireland. The absence of regularly reported figures for
Northern Ireland presents a significant gap in the
analysis of total funding available to SMEs in
Northern Ireland and thus hampers the development
of policy responses to funding gaps that might exist in
that market.
• There has been a fall in both the supply of and
demand for bank finance. Both the supply of and
the demand for bank finance has fallen significantly in
the period since 2008. In Ireland, the fall in supply
has also been impacted by the withdrawal of a
number of providers from the Irish market, in 2010
and 2013. Total outstanding credit to Irish SMEs had
decreased from €34 billion at the end of Q1 2010 to
€26 billion at the end of Q4 2012. No trend figures
are available for Northern Ireland.
• High levels of bank debt exist for the largest
sectoral employers. Of the four main sectoral
employers in each jurisdiction, three (retail,
construction and hospitality) are in distress, are very
dependent on the domestic economy, and have high
levels of bank debt.
• Demand for bank finance is focused on short
term working capital needs. Demand for credit
amongst SMEs in Ireland and Northern Ireland has
fallen significantly since its measurement began on a
systematic basis in 2009 and, where demand
currently exists, it is primarily to fund short term
working capital and to support cash flow.
• SMEs with property debts are more likely to need
working capital. SMEs with legacy property debt are
three times more likely to request working capital
finance than their counterparts, pointing to the
difficulty many SMEs are facing in servicing this debt
and the delayed beginning of restructuring
programmes for such debt in many banks.
• Most SMEs are approved for bank finance when
they apply formally. While 7% of SMEs who require
finance are afraid to approach their bank, all surveys
have consistently shown that the majority of SMEs
who apply for credit receive a favourable response.
This figure is relatively consistent with patterns shown
in similar studies carried out in other European
countries.
11
• SME views on bank lending are often not based
on personal experience. SMEs are primarily
forming the view that banks are not lending from the
information they receive from the media, business
groups or the experience related by peers rather than
from direct experience. Banks should encourage
SMEs to formally apply for credit or, at a minimum,
direct them to mediation support services within the
bank to support them with their application. This is a
model that has been adopted very successfully in
France where local mediators provide support to
SMEs in the completion of their credit applications.
• There is a misconception about SME credit
ratings. Many SMEs are concerned that a declined
credit application may impact their credit rating. This
is an incorrect assumption and SMEs should be
encouraged by policy makers, advisors and business
representative groups alike to make applications for
credit formally (i.e. by completing a formal written
application form). This is then subject to internal bank
assessment and the decision may also be appealed
internally within the bank or, in Ireland, to the Credit
Review Office.
• The average bank decision time is a concern for
SMEs. Survey results suggest that the average time
from application to reaching a decision on the loan
request is 21 working days. In many cases, decision
time is much longer and this is a source of concern
and, in some cases, distress for SMEs.
Public Finance
• Direct government funding represents less than
1% of total SME finance. Direct government
funding, not included in equity finance, represents
less than 1% of all finance extended to SMEs as at
31st December 2012.
• Poor knowledge of finance schemes exists
amongst SMEs and their advisors. The research
has found that SMEs and their advisors, business
representative groups, accountants and other
professional advisors are typically unaware of the
public schemes and funds that are available. The
complex nature of non-bank funding sources and the
varied application routes makes the use of non-bank
funding difficult and often expensive for SMEs.
• In practice, funding schemes are focused on
exporting SMEs or companies trading in specific
sectors. Whilst in theory the majority of schemes or
funds are open to all business sectors, in practice the
main beneficiaries are those SMEs who export and
those operating in the manufacturing, information and
communication technology and tradeable
professional and scientific and administrative/ support
service sectors. There is limited support for SMEs
operating in most distressed sectors outside of
traditional bank finance, the Credit Guarantee
Schemes (in Ireland and UK) and the MicroFinance
scheme in Ireland, some of which, in their early
stages, show low levels of take up.
• The SME support infrastructure is more
developed in Ireland. The SME support
infrastructure, in the area of bank finance, has
developed significantly in Ireland in recent years.
Given the similarity in access to finance issues
apparent amongst SMEs in Ireland and Northern
Ireland, there are a number of measures
implemented in Ireland in the period since 2009, that
should be considered in Northern Ireland either on a
cross-border or a specifically Northern Irish basis.
• The supports required by SMEs have changed
since the economic crisis began in Ireland and
Northern Ireland. SMEs now require tailored support
in the restructuring of balance sheets, in engaging
with banks on negotiating sustainable debt
restructuring initiatives, in developing funding
strategies for the current economic environment and
in developing overall solutions to their finance needs.
12
Equity Finance
• Equity finance is now a significant source for
SMEs. The second most significant source of funding
for SMEs is external equity finance as represented by
seed capital, venture capital and business angel
finance. External equity finance, including
government-backed equity finance, accounted for
approximately 5.6% of total SME funding at 31st
December 2012, with the proportion significantly
higher in Ireland than in Northern Ireland. Total equity
finance of €1.9 / £1.5 billion had been invested in
Irish and Northern Irish SMEs in the five year period
to 31st December 2012, the majority invested in Irish
companies.
• Equity finance is focused on a small number of
business sectors. In general equity finance is
targeted very specifically at a small number of
business sectors, mainly Information and
Communications Technology, Professional, Scientific
and Technical Services, and Manufacturing,
particularly Medical Devices.
• Demand for equity finance is low. Existing survey
data would suggest that the demand for any form of
non-bank finance is low in the general SME
community. It is generally accepted that equity
finance will only ever be suitable for a small minority
of SMEs, often start-ups and/or high potential growth
businesses and more mature companies with short to
medium term growth or expansion plans. Thus
demand for equity is restricted by the fact that
government, angel and venture capital investors
typically only provide finance to a small number of
specific businesses in targeted industry sectors which
match the investor?s portfolio, risk and return on
investment goals. Among the factors which explain
low levels of demand for and take up of equity
finance in Ireland and Northern Ireland are the profile
of SMEs, supply side issues impacting demand and
confidence in equity, and a lack of awareness and
understanding of equity finance amongst SMEs.
• A significant SME finance capability gap exists.
Despite some improvement due to access to
investment readiness support, early stage companies
still require support to improve commercial and
management skills of investee teams and support in
preparing and presenting for follow-on funding.
• There is a vibrant Irish venture capital landscape.
The Irish venture capital industry has received
significant and sustained support from the Irish
Government over the last few decades. In this time,
the Irish Government, through Enterprise Ireland (EI),
has committed approximately €348mn to 41 local
Seed and VC funds resulting in capital of
approximately €1.2 billion for investment in
innovative high growth companies. The challenge is
for potentially strong start-ups to secure follow-on
funding, pointing to a continued need for government
support of seed and early stage finance in Ireland.
• Supply gaps exist in the Northern Ireland equity
market. Significant additional investment in seed and
early stage capital is required in Northern Ireland as a
demand stimulant. A strong consensus exists that
there has been insufficient availability of risk finance
at pre-seed, seed and early stage in Northern Ireland.
In early 2013, the Invest Growth Proof of Concept
Fund (pre-commercial grant), which was fully
committed at the end of 2012, and the Invest Growth
Fund were extended by £2m each to March 2014,
with a view to putting in place increased seed and
early stage funding from April 2014.
• The level of angel investing is increasing. The
importance of business angel investing at seed and
early stage has received increasing attention due to
its growth internationally relative to venture capital
investing. The formal angel networks have and are
continuing to develop in line with international best
practice and the development of formal angel
investing has been significant over the last number of
years, including the increased development of angel
groups/syndicates. Supply statistics on formal angel
investing indicate that angel investment has
increased year-on-year since 2008. In Northern
Ireland, while levels of investment are small but
developing, angel investment is in relative terms
more important, due to the low level of venture capital
activity in Northern Ireland. It was suggested in the
13
course of the study, that a co-investment fund (one is
already in place in Northern Ireland) would be an
important feature in continuing to develop business
angel investment in Ireland as a complement to the
range of other funds in place including the Enterprise
Ireland (EI) Seed and Venture Capital Programmes.
• Northern Ireland Growth Loan fund serves a
specific demand. The Growth Loan Fund in
Northern Ireland is a mezzanine debt product, which
primarily allows growth companies to draw down
unsecured loans at higher interest rates based on
growth projections. Although primarily a debt product,
this alternative financing product may have the
potential to overcome the reluctance on the part of
some growth businesses, as outlined in Section
4.3.2, to go down the route of equity. This would
appear to have tapped in to some latent demand in
Northern Ireland and may be an important
consideration in Ireland in terms of extension of
financing options.
• The Irish National Pension Reserve Fund (NPRF)
Turnaround Fund should provide a useful policy
tool. The new NPRF SME Turnaround Fund,
introduced in Ireland in January 2013, will invest in
underperforming businesses which are at, or close to,
the point of insolvency but have the potential for
financial and operational restructuring. Demand
statistics on this fund including profile of applicants,
even where unsuccessful on the fund, may provide
important information for evidence-based policy
making for such SMEs (potential but hamstrung) and
may be a useful source of information in both
jurisdictions to address this important cohort of SMEs.
1.2 RECOMMENDATIONS
Both the supply of and demand for finance are now at
necessarily lower levels than the artificially inflated and
unsustainable peaks of a few years ago. However the
readjustment process has exposed a very narrow SME
financing landscape and provided a window of
opportunity to develop a broader and more informed
financing ecosystem that will support and not inhibit
economic recovery. Much has already been
undertaken in this regard in both Northern Ireland and
Ireland to ensure a financial ecosystem that can
support the needs of customers, support recovery and
growth and avoid the mistakes of the past. The
recommendations that follow are consistent with and
intended to support the work already completed or
ongoing. They focus on two areas that are critical for
the development of a more diverse funding landscape
across both jurisdictions. These are:
• Information; and
• Financial capability
The report then concludes with a number of
recommendations aimed at encouraging the further
development of the venture capital and angel investor
markets on the island.
INFORMATION
The availability and flow of high quality and relevant
information is fundamental to the smooth operation of
any marketplace. The following recommendations are
designed to address informational deficiencies in the
market for finance in Ireland and Northern Ireland.
Recommendation R1 – Capture bank
lending figures in Ireland and Northern
Ireland
The recent Economic Advisory Group for Northern
Ireland report (EAG, 2013) highlighted that the absence
of bank lending data was a significant issue for Northern
Ireland. It stated that “there was a general sense that
banks would sign up to the provision of regional lending
data for Northern Ireland on the proviso that they all sign
up to it and they are confident in the organisation
holding the information”. On the basis of the framework
developed in Ireland since 2009, and the fact that
supply data had been made available by the main banks
operating in Northern Ireland under that process, these
banks provided Northern Ireland data to the researchers
in the course of this study. This is an important
milestone in understanding the SME finance
environment in Northern Ireland, but the process needs
to be maintained and improved in order that patterns
and trends may be monitored and analysed over time
and appropriate policy responses developed.
Therefore, a clear and comprehensive framework for
the supply side capture of SME lending, application,
approval and rejection rates should be introduced in
14
Northern Ireland with quarterly returns of data to the
Department of Finance and Personnel. The model
which was introduced in Ireland in 2009 and handed
over to the Central Bank in 2011 could be used in this
regard. An initial process of bank data cleansing and
review would be required to support the ongoing
reporting of SME supply side data in order to ensure
the accuracy and consistency of the data provided.
Recommendation R2 – Capture
demand for finance among SMEs in
Northern Ireland
A lack of regular and consistent demand-side or
lending surveys of Northern Ireland SMEs makes it
difficult to analyse the extent of any demand gap.
Regular and detailed surveys, along the lines of the
Irish Department of Finance?s bi-annual demand
surveys should be introduced in Northern Ireland. The
InterTradeIreland Business Monitor could be used for
this purpose with the questionnaire and sample
designed in consultation with the new Access to
Finance Implementation Panel.
Policy makers also need a clearer profile and better
information on the attributes of the SME population to
inform policy development (in addition to data on
lending which receives the most attention). The
Australian model referred to in Section 6 should be
considered in this regard. This data should be
maintained on an ongoing basis, developed and held
centrally in both Ireland and Northern Ireland and
access provided to government agencies and
policymakers. This data should include:
• Sectoral profiles;
• SME employment profiles;
• Levels of reliance on domestic economy;
• Levels of distress in specific sectors;
• Extent of impact of property debt overhang; and
• Characteristics of export base and identification of
potential exporters.
Recommendation R3 – Provision of
Better Information to SMEs by
Funding Providers
All banks and public funding agencies should
endeavour to provide their SME customers with a
written and clear reason as to why their formal
application for credit has not been accepted in both
Ireland and Northern Ireland. We acknowledge this is
required at present under the Code of Conduct for
Lending to SMEs in Ireland and the need to take into
account the difficulties of communicating a negative
outcome. The explanation that is currently provided is
generally derived from a master system list of reasons
and does not provide adequate information in many
cases to the SMEs. Banks in both Ireland and Northern
Ireland should also introduce internal programmes to
ensure quicker turnaround on decisions especially at
the smaller end of SME lending (e.g. €25k to €75k).
In the case of public funding agencies this written
explanation should include some element of future
signposting – i.e. directing the SME to other more
possible alternative finance sources. This follows a
model which has been successful in France where
OSEO publishes a guide to its schemes specifically for
banks so that lenders can direct SMEs whose
application for credit has been declined to other funding
agencies.
Recommendation R4 – Encourage
Formal Credit Applications
Continued work is required to encourage SMEs to pro-
actively and formally apply for credit. Recent initiatives
such as the standardisation of the application process
in Ireland and other awareness campaigns should
assist this conversion and should be examined for roll-
out in Northern Ireland. Above all, it is important that
SMEs are made aware by banks that a rejected
application does not result in a negative credit rating.
Recommendation R5 – Promoting
Alternative Sources of Finance
Consideration should be given in Ireland to promoting
alternative financing options such as quasi-
equity/mezzanine products to provide alternatives to
those SMEs who do not want to cede control via a full
equity play. While relatively new (late 2012), the Growth
Loan Fund in Northern Ireland would suggest that there
is demand for a middle ground option such as
15
mezzanine finance, albeit that some commentators
have suggested that some of this demand may be due
to the absence of alternative equity options in Northern
Ireland. In Northern Ireland, as this is a relatively new
fund, there may be potential to increase awareness and
education of this fund and source of finance at both the
demand (SME) and supply sides (front line bank staff,
other advisors and intermediaries).
A range of alternative forms of finance have also been
relatively widely used in other countries as outlined in
Section 6 (Canada, France, Germany, US, UK), as a
post-crisis government response to reduced availability
of bank debt. Further consideration needs to be given
in both jurisdictions to extending the range of
alternative financing options available to SMEs.
A single public body in both Ireland and Northern
Ireland should be charged with the development and
maintenance of a single repository of all schemes /
supports / funds / credit facilities available to SMEs.
This database should include bank, public and equity
funding and should be both accessible and searchable
by sub-region and sector. It should be made available
publicly to SMEs, public bodies who advise SMEs,
business groups and accountants so that the complex
SME funding landscape that currently exists with over
50 funders and upwards of 170 schemes is easier to
navigate for SMEs and their advisors.
CAPABILITIES
The following recommendations are aimed at improving
financial literacy within the broader financing ecosystem
which is necessary to develop a broader based market
with a wider portfolio of financing products and solutions.
Improving the strategic preparation of SMEs for dealing
with funding providers will be key to the exploitation of
the opportunities offered by such a wide portfolio.
Recommendation R6 – Non-Financial
Support Measures for SMEs
SMEs require support in assisting them to become
more competitive, acquiring the skills to enter new
markets, securing new customers and exporting.
However, SMEs also need to acquire the financial and
development skills pertinent to the current economic
environment.
A series of publicly funded, practical educational
programmes should be made available in Ireland and
Northern Ireland to support SMEs, especially at the
micro / smaller end. These programmes should focus on:
• Navigating the funding landscape;
• Preparing cash flows for sustainable trading
businesses;
• Preparation of business plans in the current
environment including stabilization planning;
• Restructuring of balance sheets / finance positions
appropriately (balance sheet “right sizing”);
• Negotiation with banks on restructuring of debt;
• Matching finance needs with finance products or
sources;
• Management of working capital;
• Developing export capabilities;
• Analysis of finance needs (funding mix, appropriate
use of long and short term finance etc.); and
• Investment readiness preparation for companies
applying for equity or similar forms of finance.
InterTradeIreland has developed expertise in the area
of improving investor readiness for equity finance,
through EquityNetwork, and ought to explore the
potential for expanding these services and solutions for
a broader range of financing options including
applications to banks.
In particular the support provided should focus on
assisting SMEs in the capital restructuring
1
of their
balance sheets so that sustainable trading businesses
2
can be prepared and supported in approaching their
bank or funding institution with a view to securing a
fundamental balance sheet restructure. This type of
support has to be developed and delivered by those
currently advising SMEs. The advisors need to be fully
16
1
Restructuring refers to a fundamental change in the capital structure of a borrower either by mutual agreement and/or a legal process. A restructuring
can be deemed as sustainable if the borrower is in a position to ultimately repay the restructured debt amount either through amortisation payments or
asset sales.
2
A business can be deemed sustainable if it can generate a positive free cashflow before debt service, through the business cycle.
conversant with balance sheet restructuring models and
best practice SME sustainability metrics which is the
case for a limited number of professional advisory firms.
In Ireland, the establishment of the Local Enterprise
Office (LEO) framework (from the conversion of County
and City Enterprise Boards) represents an ideal
opportunity to implement this recommendation and
fundamentally change the skills profile of front line
publicly funded support staff advising SMEs. There will
also be the opportunity to promote awareness and use
of the voucher schemes, soon to be operating in both
Northern Ireland and Ireland, which are there to support
SMEs improve their financial capabilities.
Consistent with the initiatives in Australia, New Zealand
and the UK outlined in Section 6 of this document, we
suggest that a national helpline be considered to
operate on an all-island basis, possibly co-ordinated by
a cross-border body such as InterTradeIreland. This
helpline could follow a model similar to the
well-established Australian model and could also take
account of the new UK Business Link helpline. Whilst
we acknowledge that a helpline was considered in
Ireland in 2011 and discounted for cost reasons, we
suggest it should be re-examined and developed in
accordance with the models put in place in Australia,
New Zealand and the UK, that it is integrated into an
existing support agency and leverages the benefits of
additional measures such as a comprehensive
database of the products, schemes and solutions
across the funding landscape in both jurisdictions. The
helpline could operate both before and after normal
business hours, and provide information on finance
options, cash flow management, balance sheet
restructuring, government supports, business planning,
accounting, taxation and diagnostic services. An all-
island helpline could deliver economies of scale but
would also ensure that cross border initiatives as well
as new learnings from both jurisdictions are leveraged.
Recommendation R7 – SME Voucher
Schemes
Governments in Ireland and Northern Ireland currently
have SME Voucher schemes in place. This report
identified a need to enhance the capability of a
significant number of SMEs in the areas of financial and
commercial management capability, areas in which
there would appear to be a high requirement and
preference for tailored and one-to-one support.
Vouchers represent an important support for SMEs who
are currently unable to afford professional advice in
engaging with their banks or in applying for credit or
restructuring their debt levels. International research
has also suggested that cost is a significant impediment
to SMEs drawing down business support services even
where there is clear need for support. These voucher
schemes would allow SMEs to procure and pay for
professional support in particular to:
• Analyse existing balance sheet or funding positions;
• Develop funding proposals to banks, public funding
agency, venture capital or other third party funders;
and
• Support the SME in engaging with their bank in
restructuring existing debt positions for sustainable
SME trading businesses.
Demand for such voucher schemes is always high, and
they provide an effective way of both addressing the
varied needs of the heterogeneous population that
SMEs represent (micro, small, traditional, high tech,
high growth etc.), and allowing individual SMEs to cost
effectively draw down bespoke support. The
governments should monitor the uptake of these and
then consider their extension, possibly on a joint
North/South basis, like the Innovation Vouchers.
Recommendation R8 – Further
Development of the SME Capabilities
of Banks
Consideration should be given to putting in place a
small dedicated team within each pillar bank in Ireland.
This team would:
• Review rejected SME credit applications for
appropriateness and consistency of decline
decisions, thereby negating the need for an SME to
separately apply to the Credit Review Office.
• Explore the options which exist through the full or
partial use of other government backed schemes
(e.g. Credit Guarantee Scheme / Microfinance
scheme) thereby negating the need for the SME to
reapply to each scheme or fund individually,
completing different forms and providing different
information in each case.
• Reviewing informal applications or enquiries (which
the main banks are now starting to log) which are not
put forward to credit commities by the bank
relationship manager to whom the enquiry was made
and performing follow up satisfaction calls to SMEs
making such enquiries.
17
Some of the banking initiatives recently introduced by
banks in Ireland, partly at the request of the Central
Bank of Ireland and Department of Finance, should be
introduced in Northern Ireland, for example:
• Front line staff training on cash flow lending, SME
funding available, debt restructuring, sustainability
assessment;
• Dedicated distressed credit / challenged units;
• SME coaching initiatives;
• Single application form, standard business plan, cash
flow model;
• Auto grading of micro loans;
• SME feedback initiatives; and
• Dedicated SME officers in 2013.
Whilst not all the banks operating in Northern Ireland
who lend to SMEs are regulated in Ireland, for a
number of them their primary regulator is Irish and they
are supervised under passporting rules in the UK. As
such, some of these schemes could be supported or
encouraged by the Irish Central Bank. However they
represent best practice in dealing with SMEs and
distressed credit and are being rolled out in many
banks internationally and in the UK. This issue has also
been raised in the Review of Access to Finance for
SMEs in Northern Ireland (EAG, 2013).
Consideration should also be given to the development
of international trade finance products for SMEs, i.e.
export-focused guarantee scheme to support lending
under guarantee. We acknowledge that at the date of
publication of this report, this recommendation is being
considered in Ireland by the Department of Jobs,
Enterprise and Innovation.
Recommendation R9 – Further
Development of Credit Review and
Mediation Services
A number of recommendations have been made in a
recent Department of Finance report following an
assessment of the operation of the Credit Review Office
(CRO) (Grant Thornton, 2012). We welcome those
recommendations and suggest that consideration
should also be given to expanding the remit of the CRO
to include:
• Further encouragement of non-pillar banks operating
in Ireland to engage with the CRO.
• Consider the extension of the remit of the CRO
beyond its current brief to include a credit mediation
service following the example of the French credit
mediation office. The French model as (set out in
detail in Section 6) should be reviewed to assess the
benefits of a wider and distributed mediation role for
SMEs.
• Quicker turnaround times as, when an SME has a
credit problem, time is of the essence (the above
mentioned report includes recommendations on
expediting the application process).
• Sample testing of credit applications which have been
rejected by the banks but which have not been
referred by the SME to the CRO. This will over time
improve the quality of credit assessments, encourage
banks to focus more on solutions rather than just credit
decisions and ultimately will provide increased
assurance to SMEs on the robustness of the bank
credit application process. Alternatively banks should
refer a sample of all rejected credit applications across
each sector to the CRO by the participating banks.
• Consideration should be given to adopting a version of
a model similar to that developed and rolled out in the
last 3 years in France. Location of a CRO officer in
each pillar bank on an ongoing basis, so that whilst the
officer is operating independently of the bank, he/she
is none the less working in closer proximity and thus
able to discuss possible solutions with the bank and to
provide sign posting for under funding options.
We recommend that the Department of Finance and
Personnel and the Northern Ireland banks, in
conjunction with the British Banking Association and the
Independent External Reviewer agree an approach to
systematically promote the uptake of the UK Banking
Taskforce Appeals Process by Northern Irish SMEs to
ensure that existing processes are leveraged to the
greatest extent possible. In addition, consideration
should be given to an extended independent mediation
support for SMEs in Northern Ireland which
incorporates some of the benefits of other models,
including elements of the French model set out in
Section 6. This could entail a separate unit which
coordinates access to finance issues for SMEs who
have been refused bank finance but who may also
require specialist advice on their application quality and
improving the standard thereof, advice on capital
structure and financing options and signposting to more
appropriate financing solutions.
18
DEVELOPMENT OF THE VENTURE
CAPITAL AND ANGEL INVESTOR
MARKETS
Recommendation R10 – Continuation
of Government Support for Seed and
Early Stage Finance in Ireland
Consideration should be given to the following in
relation to seed and early stage finance:
• Introducing an investment follow-on fund specifically
targeted at participants of seed programmes.
• Ensuring that an appropriate range of alternative
finance options (as per recommendation R5 above
and based on examples in section 6) is available to
such businesses including entrepreneur loans or
hybrid instruments incorporating debt and
subordinated tranches.
• Targeted venture capital funding, including
consideration of Ireland-only or all-island non-seed
funds, to allow for a lower bar for some emerging
viable seed companies who may not compete at the
international level in terms of follow-on funding. The
five new Enterprise Ireland non-seed funds (Ireland-
only), currently at expression of interest stage, may
address some of these issues, albeit that they are
focused on the broad technology and life sciences
sectors.
• Continued support and assistance to emerging Irish
seed companies in competing for commercial funding
from international venture capital funds to raise the
standard in terms of financial, commercial,
management and presentational skills amongst this
group.
• Consideration may need to be given to addressing
the lack of diversification in seed and early stage
funds (focused primarily on high-tech) to ensure that
potential high-growth companies which are not
necessarily high tech are not dissuaded from the
equity route (self-selecting themselves due to a
perception that the funds are not relevant to their
sector or company type), or otherwise restricted due
to fund restrictions or the specialist focus and
preferences of the VC fund managers. We
understand that Enterprise Ireland is in discussions
with the European Investment Fund in this regard.
Recommendation R11 – Support of
Angel Investment across the island of
Ireland
The establishment of an Irish dedicated co-investment
fund or angel fund should be considered where
investment selection is initially led by the private
investors, who set the terms, but with the remaining
funding provided by the co-investment fund.
We recognise the existence of the Co-Fund NI which
supplied £1.7m in funding to seed and early stage
businesses. Co-Fund NI leveraged additional private
sector investment of £3m in addition to the Invest NI
(INI) portion of £1.7m (2012).
The establishment of a co-investment fund or angel
fund, which has merit in its own right to further promote
business angel investing, may also promote further
diversification where initially led by the private
investors.
The recent establishment of a new all-island food
business angel syndicate may demonstrate potential for
funding of ?non-tech? sectors by equity investment
although it is too early to make any detailed
assessment of the syndicate.
As the visible business angel market in Ireland is small
relative to other countries and due to the fact that
investments through structured vehicles such as the
Seed Capital Scheme (SCS) and the Employment and
Investment Incentive (EII) scheme show a downward
trend in overall investing, consideration should be given
to the following:
• Further promotion and awareness raising of the
benefits of the existing SCS and the EII scheme are
required; and
• Extension of the terms of the EII relief in line with the
more extensive and attractive UK-based Enterprise
Investment Scheme and the Seed Enterprise
Investment Scheme.
Due to the increasing relative importance of business
angels as a source of finance for SMEs and, the as yet
relatively small size of the total business angel market
in Ireland and Northern Ireland, we recommend
continued public funding of both the jurisdictional and
cross-border Business Angel network infrastructure.
19
Recommendation R12 – A Venture
Capital Strategy for Northern Ireland
Echoing the recent Review of Access to Finance for
SMEs in Northern Ireland (EAG, 2013), we recommend
that a comprehensive Venture Capital Strategy is
developed for Northern Ireland which informs and
develops the equity funds under the Access to Finance
Strategy, dovetails with the new Innovation Strategy (to
be published in early 2014) and supports wider policy
objectives to further promote entrepreneurial activity in
Northern Ireland. This strategy should address medium
to long-term considerations including the avoidance of
future gaps in the continuum of funding, an issue which
is likely to have impacted demand and confidence in
equity funding in Northern Ireland. And, in the shorter
term, it should frontload early risk capital initiatives and
associated support services to take into account the
importance role of proof of concept, seed and early
stage capital availability as a demand stimulant.
Two new development capital funds of £30m each were
awarded in 2013 and are understood to be subject to
contract at the date of writing. In early 2013, the Invest
Growth Proof of Concept Fund (pre-commercial grant),
which was fully committed at the end of 2012, and the
Invest Growth Fund were extended by £2m each to
March 2014, with a view to putting in place increased
seed and early stage funding from April 2014.
Recommendation R13 – Investment in
Seed and Early Stage Capital in
Northern Ireland
The extension of risk capital needs to be supplemented
by a range of wider support initiatives to promote
innovation and the entrepreneurial environment and
provide wrap around services to start ups. Despite
acknowledged success of some investment readiness
support programmes, it was considered that further
work was required to simplify and streamline the full
range of supports, promote them in a more
user-friendly and understandable manner, improve the
commercial and management skills of early stage
company teams, and extend the level of support
available recognising that a significant degree of
handholding was required for early stage companies.
Consideration needs to be given to the appropriate
nature and level of wrap-around services appropriate to
an extension of risk capital for seed and early stage
companies to address potential demand side
weaknesses and leverage the benefits of the
investment.
20
2. Introduction
21
This report presents the results of a study into access
to finance for growth amongst SMEs in Ireland and
Northern Ireland. The study, for the first time, examines
not only bank finance but finance available to SMEs
from other sources such as government funding,
venture capital and angel finance.
The study also, for the first time, presents a complete
picture of the supply of finance to SMEs across the
island of Ireland, in particular the supply of bank finance
in Northern Ireland. In Ireland, banks provide supply
side data to the Central Bank of Ireland. However, at
present, no such process exists within Northern Ireland.
This study provides a unique analysis of the total value
of the credit extended by banks in 2012 to SMEs in
Northern Ireland.
This study is an important component in the complete
and rigorous assessment of the current supply and
demand side issues related to bank and non-bank
finance for SMEs trading in Ireland and in Northern
Ireland.
2.1 OBJECTIVES OF THE STUDY
The three main objectives of the study are to provide:
• A review of the current information covering access to
finance for SMEs and, in particular, clarify the balance
between the supply-side and demand-side issues;
• A review of the current supply of various types of
finance for growth (including bank lending, business
angel finance and Venture Capital (VC)) and
assessing the potential for new and alternative ways
of financing enterprise growth; and
• A series of recommendations for the financial
providers, businesses and policy makers with a
particular emphasis on where cross-border
cooperation can deliver mutual gains to Northern
Ireland and Ireland.
2.2 DEFINITIONS USED IN THE
STUDY
The following definitions and explanations should be
considered in the context of the study:
• The study concentrated on direct sources of finance
which include the physical transfer of funds from a
lender or other finance provider to an SME.
• The study excluded detailed commentary on indirect
sources of finance which support SMEs by means of
trade credit, access to staff resources and/or tax
incentives.
• At an overall level, an SME is defined (using the
standard EU definition) as any entity engaged in an
economic activity, irrespective of legal form (i.e.
corporation, partnership, sole-trader, etc.), which
employs fewer than 250 persons and whose annual
turnover does not exceed €50m or whose annual
balance sheet does not exceed €43m.
• The study included companies falling into one of
three categories of SME, as determined by the EU
definition of each category, which can be broadly
summarised as follows:
EMPLOYEES TURNOVER BALANCE SHEET VALUE
MICRO
This report presents the results of a study into access to finance for growth amongst SMEs in Ireland and Northern Ireland.
ACCESS TO FINANCE FOR GROWTH FOR
SMEs ON THE ISLAND OF IRELAND
December 2013
List of figures 4
List of tables 6
Acknowledgements 7
Foreword 9
1 Executive Summary 10
1.1 Key Findings 10
1.2 Recommendations 14
2 Introduction 21
2.1 Objectives of the Study 21
2.2 Definitions used in the Study 21
2.3 Report Structure 22
3 SME Lending Context 24
3.1 The Importance of SMEs to the Economy 24
3.2 Economic Context 25
3.3 SME Business Performance 31
3.4 SME Business Concerns 35
3.5 How SMEs are Financing their Businesses 38
4 Demand For Finance 44
4.1 Demand for Finance 44
4.2 The Bank Application Process, Procedures and Criteria 67
4.3 Demand for Non-Bank Finance 70
5 Supply of Finance 75
5.1 Overall Supply of Finance 75
5.2 Supply of Bank Finance 76
5.3 Supply of Equity Finance 83
5.4 Supply of Public Finance 93
5.5 The Funding Landscape 96
5.6 Sources of Finance 97
6 International Best Practice 100
6.1 Introduction 100
6.2 Diversifying Financing and the Promotion of Alternative
Financing Options/ Non Bank Lending 100
6.3 Improving financial capability through awareness of financing schemes
and targeted support to SMEs seeking Finance 102
6.4 Improving information on SMEs and Finance 107
7 Conclusions and Recommendations 108
7.1 Conclusions 108
7.2 Recommendations 113
APPENDICES:
1. Funding landscape map – Ireland 124
2. Funding landscape map – Northern Ireland 125
3. Assumptions used in compiling supply side data 126
4. List of consultees 127
Contents
3
Figure 1: SME Size Split 24
Figure 2: SME Profile – Number and People Employed 24
Figure 3: Employee Share of Total SME Employment by Business Sector 25
Figure 4: Impact of Economic Downturn 26
Figure 5: Components of Irish Economic Growth (GDP) 1996-2012 27
Figure 6: Exporting Profile 28
Figure 7: Irish Domestic Banks? SME/Corporate Lending, Impaired and Vulnerable Loans 2012 30
Figure 8: Irish Domestics Banks? Flow of Impaired Loans as a Percentage of Outstanding Lending 2012 30
Figure 9: Sales Performance in Ireland and Northern Ireland 31
Figure 10: Employment Performance in Ireland and Northern Ireland 32
Figure 11: Profit in the Business in the Last 12 Months 32
Figure 12: Current Status of the Business. 33
Figure 13: Current Status of the Business by Sector 34
Figure 14: SME Constraints on Business Growth Plans 35
Figure 15: Current Issues for SMEs in Business. 36
Figure 16: SAFE Survey Euro Area SME Business Issues 37
Figure 17: SAFE Survey Euro Area SME Business Issues – Country Comparison 37
Figure 18: SMEs with Some Form of External Finance in Place 38
Figure 19: Types of Finance in Place 39
Figure 20: Sources of Finance – Ireland v EU Average 39
Figure 21: SMEs with Grants in Place 40
Figure 22: Sectoral Profile of SMEs with Grants in Place 40
Figure 23: Cashflow as an Issue for the Business 41
Figure 24: Working Capital Management – Changes in Receipts from Customers 42
Figure 25: Working Capital Management – Changed in Payments to Suppliers 42
Figure 26: Cheque Usage in Europe 43
Figure 27: The Funding Journey 44
Figure 28: Bank Approval Rates 2007 v 2010 45
Figure 29: SME Demand for Finance per Department of Finance SME Demand Surveys 46
Figure 30: Changes in Credit Demand 47
Figure 31: SME Demand Profile 48
Figure 32: Lending Products Requested by SMEs - InterTradeIreland 49
Figure 33: Lending Products Requested by SMEs – Department of Finance 49
Figure 34: Goods/Commercial Vehicles Licenced for the First Time 50
Figure 35: Demand by Business Sector – InterTradeIreland 50
Figure 36: Demand by Business Sector (Ireland) – Department of Finance 51
Figure 37: Likelihood of Requiring Finance in the Next 12 Months 52
Figure 38: Purpose of Finance Applied For 52
Figure 39: Purpose of Application by Product 53
Figure 40: Purpose of Finance Applied by Business Status 54
Figure 41: Demand by Business Purpose (Investment – v- Working Capital) 54
Figure 42: Enterprise Births and Deaths on the Island of Ireland 56
List of Figures
4
Figure 43: SME Bank Relationship 56
Figure 44: SME Perception of Bank Lending Practices 57
Figure 45: Business View Lending to Irish SMEs in the Last Six Months 58
Figure 46: Central Bank Research on SAFE Surveys 59
Figure 47: Changes in Credit Standards on Loans to Enterprises 60
Figure 48: Businesses Considering Applying for Finance but Deciding Not to Proceed 60
Figure 49: Reason for Not Proceeding with Application for Finance 61
Figure 50: Property Purchased by Company Since 2005 using Bank Debt 62
Figure 51: Relevance of Property Debt in Consideration in Raising New Finance for Business 62
Figure 52: Missed Repayments on Existing Bank Credit Facilities by Sector 64
Figure 53: SMEs Avoiding Approaching their Bank in Case They Try to Restructure Existing Credit Arrangements 65
Figure 54: The Outcome of Applications for Finance 65
Figure 55: SMEs Perception of Banks Understanding their Business 66
Figure 56: How Businesses Rate Their Abilities 68
Figure 57: Demand for Non-Bank Finance 70
Figure 58: Awareness of Public Finance Schemes 74
Figure 59: Total Bank Lending to SMES (Exposure) - Euro 78
Figure 60: Employee Share of Total SME Employment by Business Sector 78
Figure 61: Outstanding Credit (Exposure) Share of Total SME Credit by Business Sector 78
Figure 62: Outstanding Credit (Exposure) Share of Total SME Credit by Business Sector, by location 79
Figure 63: Credit Advanced to Irish Resident Small and Medium Sized Enterprises (Ireland only) 82
Figure 64: Credit Advanced to Irish Resident Small and Medium Sized Enterprises (Ireland only) 82
Figure 65: Island of Ireland Equity Landscape 84
Figure 66: Angel Funding in Ireland and Northern Ireland (Combined) 87
Figure 67: Equity Raised through BES/EII/SCS in Ireland 88
Figure 68: Business Sector Analysis of Equity Funding - 2012 89
Figure 69: Detailed Business Sector Analysis of Equity Funding - 2012 89
Figure 70: Sector Focus of Publicly Funded Schemes (Ireland) 94
Figure 71: Sector Focus of Publicly Funded Schemes (Northern Ireland) 95
Figure 72: Profile of Government Funding 96
Figure 73: Sectoral Profile of all SME Products/ Schemes 98
5
6
Table 1: Total Supply of Funding to SMEs 75
Table 2: Total Bank Lending to SMEs (exposure) 77
Table 3: Value of credit requested 80
Table 4: Approval Rates by product 80
Table 5: Average Formal Credit Application Value - Total 81
Table 6: Average Formal Credit Application Value - Core Business Lending 81
Table 7: Total Estimated SME Equity Finance 83
Table 8: Northern Ireland Equity Funds - 2012 86
Table 9: Geographical Focus of Equity Funds 92
Table 10: Investment Trend by Jurisdiction of Investee Company 92
Table 11: SME Funding Providers and Schemes 98
Table 12: UK Channel / Source of Finance 102
Table 13: Awareness of access to finance initiatives 103
Table 14: Barriers to take-up and use of Business Support 104
Table 15: International Business Development Services 105
List of Tables
7
InterTradeIreland would like to thank the individuals who agreed to be interviewed
for the research and the companies who participated in the survey. We would also
like to thank the steering group members who provided very important insights
and direction to the research.
Steering Group:
Aidan Gough InterTradeIreland (Chair)
Páraig Hennessy Department of Jobs, Enterprise and Innovation
Aidan McMahon Department of Enterprise, Trade and Investment
Fiona McCausland Department of Enterprise, Trade and Investment
Gráinne Lennon InterTradeIreland
Eoin Magennis InterTradeIreland
Johann Gallagher Strategic Investment Board (NI)
Adrian Devitt Forfás
Allen Martin Invest Northern Ireland
Donnchadh Cullinan Enterprise Ireland
Anthony O?Brien Irish Banking Federation
Bob McGowan-Smyth Crescent Capital
Debbie Rennick Irish Venture Capital Association/ACT Capital
Drew O?Sullivan InterTradeIreland
Nigel Smyth Confederation of British Industry
Wilfred Mitchell/Roger Pollen Federation of Small Businesses (NI)
Patricia Callan Small Firms Association
Mark Fielding Irish Small and Medium Enterprises Association
Seán Murphy Chambers Ireland
InterTradeIreland acknowledges the background research provided by Mazars and Perceptive Insight. Further work
has been undertaken by InterTradeIreland staff, Aidan Gough and Eoin Magennis.
Disclaimer
InterTradeIreland is confident that the information and opinions contained in this document have been compiled or arrived at by the authors from
sources believed to be reliable or in good faith, but no representation or warranty, express or implied, is made to their accuracy, completeness or
correctness. All opinions and estimates contained in this document constitute the authors? judgement as of the date of this document and are subject to
change without notice. The publication is intended to provide general information to its readers regarding the subject matter of the publication. It is not
intended to provide a comprehensive statement of the subject matter of the publication and does not necessarily reflect the views of InterTradeIreland.
While care has been taken in the production of the publication, no responsibility is accepted by InterTradeIreland for any errors or omissions herein.
Acknowledgements
8
9
There are approximately 300,000 small and medium sized enterprises (SMEs) on the island of Ireland. These
enterprises have a disproportionate reliance on the banking sector for their external financing needs. The well-
documented distress experienced by that sector has had a powerfully disruptive influence on the wider economy. This
has had a particularly negative impact on the market for finance, the proper functioning of which is a prerequisite of a
growing economy.
The primary aim of this report is to provide, for the first time, a reliable indication of the supply of finance for
businesses across the island. More specifically, the report fills the gap that has been caused by the unavailability of
supply-side data for the Northern Ireland market. Using, as far as possible, the same methodology as is used in
Ireland, we estimate that, in total, bank funding to SMEs in Northern Ireland in 2012 amounted to £4.7bn. It is
important for policy makers that this figure is available on an annual basis as this informational deficit seriously
curtails their ability to respond to the needs of Northern Ireland?s SME community.
The fracture in the relationship between banks and our SME community, while leaving a considerable problem in
terms of property debt and bank recapitalisation, has also revealed a serious number of defects in the wider financial
ecosystem that supports the needs of growth-focused SMEs. This report seeks to widen the debate from an
important but narrow focus on the supply of and demand for bank finance to a broader, more comprehensive
discussion on the availability and use of appropriate financial instruments to support and drive growing SMEs. The
need to broaden the diversity of lending options accessible to SMEs has become even more urgent, particularly in
Ireland where the banking sector has become extremely concentrated with the withdrawal of several foreign-owned
banks.
In both Ireland and Northern Ireland there is a disproportionate reliance on short term financing options, particularly
overdrafts, which in many instances are not the best vehicle to finance growth strategies. It is important not just to
widen the availability of more suitable funding options, creating a more sophisticated and diverse financial ecosystem
across the island but, just as crucially, to ensure that businesses are aware of their options and informed about their
choices.
The recommendations therefore address two key areas: information and financial capability. They are consistent with
and designed to support and perhaps accelerate work already ongoing in both jurisdictions by improving the
likelihood that the financing product sought is the most appropriate match to the SMEs needs.
Foreword
This report presents the results of a study into access
to finance for growth amongst SMEs in Ireland and
Northern Ireland. The study aims, for the first time, to
examine not only bank finance but finance available to
SMEs from other sources such as government funding,
venture capital and angel finance.
The study uniquely presents a complete picture of the
supply of finance to SMEs across the island of Ireland,
in particular the supply of bank finance in Northern
Ireland. In Ireland, banks provide supply-side data to
the Central Bank of Ireland. However, at present, no
such process exists within Northern Ireland. This study
provides the first analysis of the total value of the credit
extended by banks in 2012 to SMEs in Northern
Ireland. This study is an important component in the
complete and rigorous assessment of the current
supply and demand side issues related to bank and
non-bank finance for SMEs trading in Ireland and in
Northern Ireland.
The key findings and recommendations are
summarised below.
1. KEY FINDINGS
IMPORTANCE OF UNDERSTANDING
THE LENDING CONTEXT FOR SMES
• Demand is at least as important, if not more
important than supply, as the key SME finance
issue. The data gathered for this report shows that
demand for credit is currently at its lowest level since
2010, as measured by applications for credit by
SMEs. In addition, businesses say that the supply of
finance is no longer the most significant issue facing
them, with finding new customers and/or addressing
cost pressures now cited as their most significant
challenge. However, a concern remains that, when an
economic recovery begins to gain momentum, it
could be inhibited or even derailed by a supply-side
deficit.
• There is a dearth of diversity in the financing
landscape for SMEs across the island. The capital
structures, market and economic position of SMEs on
the island have a disproportionate reliance on banks
for their funding needs. Bank funding, largely in the
form of overdrafts and loans, accounts for 94% of
total SME finance which is comfortably greater than
other European counterparts.
• A general lack of financial literacy exists across
the broad financing landscape. A lack of knowledge
on alternative funding options is inhibiting the
development of a more diverse funding panorama for
SMEs and the subsequent use of more appropriate
and less costly funding alternatives. Not only is there
an over-reliance on bank funding but local SMEs are
also more reliant on short term finance, in particular
overdrafts and trade credit, in comparison to the EU
average. They also still have a significant
dependency on cheques rather than funds transfer or
other payment methods.
• There is a lack of balance sheet “right sizing”. In
general, Irish and Northern Irish banks need to be
more engaged in the debt restructuring or write off of
debt for SMEs who demonstrate sustainable trading
positions but are over-leveraged due to property or
other legacy debt issues. Banks are only very slowly
disengaging from short term forbearance measures,
a temporary and short term solution which, in the
absence of strong economic growth, may not address
the need for long term restructuring of the balance
sheets of many SMEs. A sustainable SME whose
debt has been “right sized” to a level which they can
service is a better asset to both the bank and wider
economy.
• A lack of investment is potentially damaging
SMEs businesses. The economies of Ireland and
Northern Ireland are both heavily dominated by
SMEs, particularly micro companies with low levels of
turnover, employees and a domestic economy focus.
While there are encouraging signs that more firms
are moving to a growth mode, a still significant
proportion of SMEs are focussed on survival or
stabilisation not on growth or expansion and, as such,
are not looking for growth or development capital
from any finance source. A lack of investment in a
business ultimately damages that business and
therefore represents a systemic and long term risk to
the economies of Northern Ireland and Ireland.
10
1. Executive Summary
• There is a continued need to leverage EU-wide
and UK initiatives. Both Ireland and Northern Ireland
have been successful in drawing down support under
EU measures. Ongoing engagement with the EU will
remain an important aspect of SME policy to ensure
maximum potential is derived from the range of
available EU funding initiatives, such as the
Competitiveness and Innovation Programme,
JEREMIE and the European Investment Bank. With
regard to UK initiatives the authorities in Northern
Ireland remain concerned to ensure that regional
needs are addressed and responses can be tailored,
in order to ensure maximum benefit from the
Enterprise Finance Guarantee Scheme and the
Funding for Lending Scheme.
SUPPLY OF AND DEMAND FOR
FINANCE FOR GROWTH
Bank Finance
• The report provides, for the first time, a picture of
total supply of bank finance for both Ireland and
Northern Ireland. As at 31st December 2012 total
bank finance of €31.5 / £25.7 billion had been
extended to Irish and Northern Irish SMEs. Of this
total €25.7 / £20.9 billion is to Irish SMEs and €5.8 /
£4.7 billion to Northern Irish SMEs.
• Businesses are over-reliant on bank funding. As
at 31st December 2012 94% of total SME finance for
both Irish and Northern Irish SMEs came from bank
funding. In comparison to European SMEs, Irish and
Northern Irish SMEs demonstrate an overreliance on
short term bank finance with a disproportionately high
use of overdrafts.
• A lack of bank supply data exists for Northern
Ireland. The absence of regularly reported figures for
Northern Ireland presents a significant gap in the
analysis of total funding available to SMEs in
Northern Ireland and thus hampers the development
of policy responses to funding gaps that might exist in
that market.
• There has been a fall in both the supply of and
demand for bank finance. Both the supply of and
the demand for bank finance has fallen significantly in
the period since 2008. In Ireland, the fall in supply
has also been impacted by the withdrawal of a
number of providers from the Irish market, in 2010
and 2013. Total outstanding credit to Irish SMEs had
decreased from €34 billion at the end of Q1 2010 to
€26 billion at the end of Q4 2012. No trend figures
are available for Northern Ireland.
• High levels of bank debt exist for the largest
sectoral employers. Of the four main sectoral
employers in each jurisdiction, three (retail,
construction and hospitality) are in distress, are very
dependent on the domestic economy, and have high
levels of bank debt.
• Demand for bank finance is focused on short
term working capital needs. Demand for credit
amongst SMEs in Ireland and Northern Ireland has
fallen significantly since its measurement began on a
systematic basis in 2009 and, where demand
currently exists, it is primarily to fund short term
working capital and to support cash flow.
• SMEs with property debts are more likely to need
working capital. SMEs with legacy property debt are
three times more likely to request working capital
finance than their counterparts, pointing to the
difficulty many SMEs are facing in servicing this debt
and the delayed beginning of restructuring
programmes for such debt in many banks.
• Most SMEs are approved for bank finance when
they apply formally. While 7% of SMEs who require
finance are afraid to approach their bank, all surveys
have consistently shown that the majority of SMEs
who apply for credit receive a favourable response.
This figure is relatively consistent with patterns shown
in similar studies carried out in other European
countries.
11
• SME views on bank lending are often not based
on personal experience. SMEs are primarily
forming the view that banks are not lending from the
information they receive from the media, business
groups or the experience related by peers rather than
from direct experience. Banks should encourage
SMEs to formally apply for credit or, at a minimum,
direct them to mediation support services within the
bank to support them with their application. This is a
model that has been adopted very successfully in
France where local mediators provide support to
SMEs in the completion of their credit applications.
• There is a misconception about SME credit
ratings. Many SMEs are concerned that a declined
credit application may impact their credit rating. This
is an incorrect assumption and SMEs should be
encouraged by policy makers, advisors and business
representative groups alike to make applications for
credit formally (i.e. by completing a formal written
application form). This is then subject to internal bank
assessment and the decision may also be appealed
internally within the bank or, in Ireland, to the Credit
Review Office.
• The average bank decision time is a concern for
SMEs. Survey results suggest that the average time
from application to reaching a decision on the loan
request is 21 working days. In many cases, decision
time is much longer and this is a source of concern
and, in some cases, distress for SMEs.
Public Finance
• Direct government funding represents less than
1% of total SME finance. Direct government
funding, not included in equity finance, represents
less than 1% of all finance extended to SMEs as at
31st December 2012.
• Poor knowledge of finance schemes exists
amongst SMEs and their advisors. The research
has found that SMEs and their advisors, business
representative groups, accountants and other
professional advisors are typically unaware of the
public schemes and funds that are available. The
complex nature of non-bank funding sources and the
varied application routes makes the use of non-bank
funding difficult and often expensive for SMEs.
• In practice, funding schemes are focused on
exporting SMEs or companies trading in specific
sectors. Whilst in theory the majority of schemes or
funds are open to all business sectors, in practice the
main beneficiaries are those SMEs who export and
those operating in the manufacturing, information and
communication technology and tradeable
professional and scientific and administrative/ support
service sectors. There is limited support for SMEs
operating in most distressed sectors outside of
traditional bank finance, the Credit Guarantee
Schemes (in Ireland and UK) and the MicroFinance
scheme in Ireland, some of which, in their early
stages, show low levels of take up.
• The SME support infrastructure is more
developed in Ireland. The SME support
infrastructure, in the area of bank finance, has
developed significantly in Ireland in recent years.
Given the similarity in access to finance issues
apparent amongst SMEs in Ireland and Northern
Ireland, there are a number of measures
implemented in Ireland in the period since 2009, that
should be considered in Northern Ireland either on a
cross-border or a specifically Northern Irish basis.
• The supports required by SMEs have changed
since the economic crisis began in Ireland and
Northern Ireland. SMEs now require tailored support
in the restructuring of balance sheets, in engaging
with banks on negotiating sustainable debt
restructuring initiatives, in developing funding
strategies for the current economic environment and
in developing overall solutions to their finance needs.
12
Equity Finance
• Equity finance is now a significant source for
SMEs. The second most significant source of funding
for SMEs is external equity finance as represented by
seed capital, venture capital and business angel
finance. External equity finance, including
government-backed equity finance, accounted for
approximately 5.6% of total SME funding at 31st
December 2012, with the proportion significantly
higher in Ireland than in Northern Ireland. Total equity
finance of €1.9 / £1.5 billion had been invested in
Irish and Northern Irish SMEs in the five year period
to 31st December 2012, the majority invested in Irish
companies.
• Equity finance is focused on a small number of
business sectors. In general equity finance is
targeted very specifically at a small number of
business sectors, mainly Information and
Communications Technology, Professional, Scientific
and Technical Services, and Manufacturing,
particularly Medical Devices.
• Demand for equity finance is low. Existing survey
data would suggest that the demand for any form of
non-bank finance is low in the general SME
community. It is generally accepted that equity
finance will only ever be suitable for a small minority
of SMEs, often start-ups and/or high potential growth
businesses and more mature companies with short to
medium term growth or expansion plans. Thus
demand for equity is restricted by the fact that
government, angel and venture capital investors
typically only provide finance to a small number of
specific businesses in targeted industry sectors which
match the investor?s portfolio, risk and return on
investment goals. Among the factors which explain
low levels of demand for and take up of equity
finance in Ireland and Northern Ireland are the profile
of SMEs, supply side issues impacting demand and
confidence in equity, and a lack of awareness and
understanding of equity finance amongst SMEs.
• A significant SME finance capability gap exists.
Despite some improvement due to access to
investment readiness support, early stage companies
still require support to improve commercial and
management skills of investee teams and support in
preparing and presenting for follow-on funding.
• There is a vibrant Irish venture capital landscape.
The Irish venture capital industry has received
significant and sustained support from the Irish
Government over the last few decades. In this time,
the Irish Government, through Enterprise Ireland (EI),
has committed approximately €348mn to 41 local
Seed and VC funds resulting in capital of
approximately €1.2 billion for investment in
innovative high growth companies. The challenge is
for potentially strong start-ups to secure follow-on
funding, pointing to a continued need for government
support of seed and early stage finance in Ireland.
• Supply gaps exist in the Northern Ireland equity
market. Significant additional investment in seed and
early stage capital is required in Northern Ireland as a
demand stimulant. A strong consensus exists that
there has been insufficient availability of risk finance
at pre-seed, seed and early stage in Northern Ireland.
In early 2013, the Invest Growth Proof of Concept
Fund (pre-commercial grant), which was fully
committed at the end of 2012, and the Invest Growth
Fund were extended by £2m each to March 2014,
with a view to putting in place increased seed and
early stage funding from April 2014.
• The level of angel investing is increasing. The
importance of business angel investing at seed and
early stage has received increasing attention due to
its growth internationally relative to venture capital
investing. The formal angel networks have and are
continuing to develop in line with international best
practice and the development of formal angel
investing has been significant over the last number of
years, including the increased development of angel
groups/syndicates. Supply statistics on formal angel
investing indicate that angel investment has
increased year-on-year since 2008. In Northern
Ireland, while levels of investment are small but
developing, angel investment is in relative terms
more important, due to the low level of venture capital
activity in Northern Ireland. It was suggested in the
13
course of the study, that a co-investment fund (one is
already in place in Northern Ireland) would be an
important feature in continuing to develop business
angel investment in Ireland as a complement to the
range of other funds in place including the Enterprise
Ireland (EI) Seed and Venture Capital Programmes.
• Northern Ireland Growth Loan fund serves a
specific demand. The Growth Loan Fund in
Northern Ireland is a mezzanine debt product, which
primarily allows growth companies to draw down
unsecured loans at higher interest rates based on
growth projections. Although primarily a debt product,
this alternative financing product may have the
potential to overcome the reluctance on the part of
some growth businesses, as outlined in Section
4.3.2, to go down the route of equity. This would
appear to have tapped in to some latent demand in
Northern Ireland and may be an important
consideration in Ireland in terms of extension of
financing options.
• The Irish National Pension Reserve Fund (NPRF)
Turnaround Fund should provide a useful policy
tool. The new NPRF SME Turnaround Fund,
introduced in Ireland in January 2013, will invest in
underperforming businesses which are at, or close to,
the point of insolvency but have the potential for
financial and operational restructuring. Demand
statistics on this fund including profile of applicants,
even where unsuccessful on the fund, may provide
important information for evidence-based policy
making for such SMEs (potential but hamstrung) and
may be a useful source of information in both
jurisdictions to address this important cohort of SMEs.
1.2 RECOMMENDATIONS
Both the supply of and demand for finance are now at
necessarily lower levels than the artificially inflated and
unsustainable peaks of a few years ago. However the
readjustment process has exposed a very narrow SME
financing landscape and provided a window of
opportunity to develop a broader and more informed
financing ecosystem that will support and not inhibit
economic recovery. Much has already been
undertaken in this regard in both Northern Ireland and
Ireland to ensure a financial ecosystem that can
support the needs of customers, support recovery and
growth and avoid the mistakes of the past. The
recommendations that follow are consistent with and
intended to support the work already completed or
ongoing. They focus on two areas that are critical for
the development of a more diverse funding landscape
across both jurisdictions. These are:
• Information; and
• Financial capability
The report then concludes with a number of
recommendations aimed at encouraging the further
development of the venture capital and angel investor
markets on the island.
INFORMATION
The availability and flow of high quality and relevant
information is fundamental to the smooth operation of
any marketplace. The following recommendations are
designed to address informational deficiencies in the
market for finance in Ireland and Northern Ireland.
Recommendation R1 – Capture bank
lending figures in Ireland and Northern
Ireland
The recent Economic Advisory Group for Northern
Ireland report (EAG, 2013) highlighted that the absence
of bank lending data was a significant issue for Northern
Ireland. It stated that “there was a general sense that
banks would sign up to the provision of regional lending
data for Northern Ireland on the proviso that they all sign
up to it and they are confident in the organisation
holding the information”. On the basis of the framework
developed in Ireland since 2009, and the fact that
supply data had been made available by the main banks
operating in Northern Ireland under that process, these
banks provided Northern Ireland data to the researchers
in the course of this study. This is an important
milestone in understanding the SME finance
environment in Northern Ireland, but the process needs
to be maintained and improved in order that patterns
and trends may be monitored and analysed over time
and appropriate policy responses developed.
Therefore, a clear and comprehensive framework for
the supply side capture of SME lending, application,
approval and rejection rates should be introduced in
14
Northern Ireland with quarterly returns of data to the
Department of Finance and Personnel. The model
which was introduced in Ireland in 2009 and handed
over to the Central Bank in 2011 could be used in this
regard. An initial process of bank data cleansing and
review would be required to support the ongoing
reporting of SME supply side data in order to ensure
the accuracy and consistency of the data provided.
Recommendation R2 – Capture
demand for finance among SMEs in
Northern Ireland
A lack of regular and consistent demand-side or
lending surveys of Northern Ireland SMEs makes it
difficult to analyse the extent of any demand gap.
Regular and detailed surveys, along the lines of the
Irish Department of Finance?s bi-annual demand
surveys should be introduced in Northern Ireland. The
InterTradeIreland Business Monitor could be used for
this purpose with the questionnaire and sample
designed in consultation with the new Access to
Finance Implementation Panel.
Policy makers also need a clearer profile and better
information on the attributes of the SME population to
inform policy development (in addition to data on
lending which receives the most attention). The
Australian model referred to in Section 6 should be
considered in this regard. This data should be
maintained on an ongoing basis, developed and held
centrally in both Ireland and Northern Ireland and
access provided to government agencies and
policymakers. This data should include:
• Sectoral profiles;
• SME employment profiles;
• Levels of reliance on domestic economy;
• Levels of distress in specific sectors;
• Extent of impact of property debt overhang; and
• Characteristics of export base and identification of
potential exporters.
Recommendation R3 – Provision of
Better Information to SMEs by
Funding Providers
All banks and public funding agencies should
endeavour to provide their SME customers with a
written and clear reason as to why their formal
application for credit has not been accepted in both
Ireland and Northern Ireland. We acknowledge this is
required at present under the Code of Conduct for
Lending to SMEs in Ireland and the need to take into
account the difficulties of communicating a negative
outcome. The explanation that is currently provided is
generally derived from a master system list of reasons
and does not provide adequate information in many
cases to the SMEs. Banks in both Ireland and Northern
Ireland should also introduce internal programmes to
ensure quicker turnaround on decisions especially at
the smaller end of SME lending (e.g. €25k to €75k).
In the case of public funding agencies this written
explanation should include some element of future
signposting – i.e. directing the SME to other more
possible alternative finance sources. This follows a
model which has been successful in France where
OSEO publishes a guide to its schemes specifically for
banks so that lenders can direct SMEs whose
application for credit has been declined to other funding
agencies.
Recommendation R4 – Encourage
Formal Credit Applications
Continued work is required to encourage SMEs to pro-
actively and formally apply for credit. Recent initiatives
such as the standardisation of the application process
in Ireland and other awareness campaigns should
assist this conversion and should be examined for roll-
out in Northern Ireland. Above all, it is important that
SMEs are made aware by banks that a rejected
application does not result in a negative credit rating.
Recommendation R5 – Promoting
Alternative Sources of Finance
Consideration should be given in Ireland to promoting
alternative financing options such as quasi-
equity/mezzanine products to provide alternatives to
those SMEs who do not want to cede control via a full
equity play. While relatively new (late 2012), the Growth
Loan Fund in Northern Ireland would suggest that there
is demand for a middle ground option such as
15
mezzanine finance, albeit that some commentators
have suggested that some of this demand may be due
to the absence of alternative equity options in Northern
Ireland. In Northern Ireland, as this is a relatively new
fund, there may be potential to increase awareness and
education of this fund and source of finance at both the
demand (SME) and supply sides (front line bank staff,
other advisors and intermediaries).
A range of alternative forms of finance have also been
relatively widely used in other countries as outlined in
Section 6 (Canada, France, Germany, US, UK), as a
post-crisis government response to reduced availability
of bank debt. Further consideration needs to be given
in both jurisdictions to extending the range of
alternative financing options available to SMEs.
A single public body in both Ireland and Northern
Ireland should be charged with the development and
maintenance of a single repository of all schemes /
supports / funds / credit facilities available to SMEs.
This database should include bank, public and equity
funding and should be both accessible and searchable
by sub-region and sector. It should be made available
publicly to SMEs, public bodies who advise SMEs,
business groups and accountants so that the complex
SME funding landscape that currently exists with over
50 funders and upwards of 170 schemes is easier to
navigate for SMEs and their advisors.
CAPABILITIES
The following recommendations are aimed at improving
financial literacy within the broader financing ecosystem
which is necessary to develop a broader based market
with a wider portfolio of financing products and solutions.
Improving the strategic preparation of SMEs for dealing
with funding providers will be key to the exploitation of
the opportunities offered by such a wide portfolio.
Recommendation R6 – Non-Financial
Support Measures for SMEs
SMEs require support in assisting them to become
more competitive, acquiring the skills to enter new
markets, securing new customers and exporting.
However, SMEs also need to acquire the financial and
development skills pertinent to the current economic
environment.
A series of publicly funded, practical educational
programmes should be made available in Ireland and
Northern Ireland to support SMEs, especially at the
micro / smaller end. These programmes should focus on:
• Navigating the funding landscape;
• Preparing cash flows for sustainable trading
businesses;
• Preparation of business plans in the current
environment including stabilization planning;
• Restructuring of balance sheets / finance positions
appropriately (balance sheet “right sizing”);
• Negotiation with banks on restructuring of debt;
• Matching finance needs with finance products or
sources;
• Management of working capital;
• Developing export capabilities;
• Analysis of finance needs (funding mix, appropriate
use of long and short term finance etc.); and
• Investment readiness preparation for companies
applying for equity or similar forms of finance.
InterTradeIreland has developed expertise in the area
of improving investor readiness for equity finance,
through EquityNetwork, and ought to explore the
potential for expanding these services and solutions for
a broader range of financing options including
applications to banks.
In particular the support provided should focus on
assisting SMEs in the capital restructuring
1
of their
balance sheets so that sustainable trading businesses
2
can be prepared and supported in approaching their
bank or funding institution with a view to securing a
fundamental balance sheet restructure. This type of
support has to be developed and delivered by those
currently advising SMEs. The advisors need to be fully
16
1
Restructuring refers to a fundamental change in the capital structure of a borrower either by mutual agreement and/or a legal process. A restructuring
can be deemed as sustainable if the borrower is in a position to ultimately repay the restructured debt amount either through amortisation payments or
asset sales.
2
A business can be deemed sustainable if it can generate a positive free cashflow before debt service, through the business cycle.
conversant with balance sheet restructuring models and
best practice SME sustainability metrics which is the
case for a limited number of professional advisory firms.
In Ireland, the establishment of the Local Enterprise
Office (LEO) framework (from the conversion of County
and City Enterprise Boards) represents an ideal
opportunity to implement this recommendation and
fundamentally change the skills profile of front line
publicly funded support staff advising SMEs. There will
also be the opportunity to promote awareness and use
of the voucher schemes, soon to be operating in both
Northern Ireland and Ireland, which are there to support
SMEs improve their financial capabilities.
Consistent with the initiatives in Australia, New Zealand
and the UK outlined in Section 6 of this document, we
suggest that a national helpline be considered to
operate on an all-island basis, possibly co-ordinated by
a cross-border body such as InterTradeIreland. This
helpline could follow a model similar to the
well-established Australian model and could also take
account of the new UK Business Link helpline. Whilst
we acknowledge that a helpline was considered in
Ireland in 2011 and discounted for cost reasons, we
suggest it should be re-examined and developed in
accordance with the models put in place in Australia,
New Zealand and the UK, that it is integrated into an
existing support agency and leverages the benefits of
additional measures such as a comprehensive
database of the products, schemes and solutions
across the funding landscape in both jurisdictions. The
helpline could operate both before and after normal
business hours, and provide information on finance
options, cash flow management, balance sheet
restructuring, government supports, business planning,
accounting, taxation and diagnostic services. An all-
island helpline could deliver economies of scale but
would also ensure that cross border initiatives as well
as new learnings from both jurisdictions are leveraged.
Recommendation R7 – SME Voucher
Schemes
Governments in Ireland and Northern Ireland currently
have SME Voucher schemes in place. This report
identified a need to enhance the capability of a
significant number of SMEs in the areas of financial and
commercial management capability, areas in which
there would appear to be a high requirement and
preference for tailored and one-to-one support.
Vouchers represent an important support for SMEs who
are currently unable to afford professional advice in
engaging with their banks or in applying for credit or
restructuring their debt levels. International research
has also suggested that cost is a significant impediment
to SMEs drawing down business support services even
where there is clear need for support. These voucher
schemes would allow SMEs to procure and pay for
professional support in particular to:
• Analyse existing balance sheet or funding positions;
• Develop funding proposals to banks, public funding
agency, venture capital or other third party funders;
and
• Support the SME in engaging with their bank in
restructuring existing debt positions for sustainable
SME trading businesses.
Demand for such voucher schemes is always high, and
they provide an effective way of both addressing the
varied needs of the heterogeneous population that
SMEs represent (micro, small, traditional, high tech,
high growth etc.), and allowing individual SMEs to cost
effectively draw down bespoke support. The
governments should monitor the uptake of these and
then consider their extension, possibly on a joint
North/South basis, like the Innovation Vouchers.
Recommendation R8 – Further
Development of the SME Capabilities
of Banks
Consideration should be given to putting in place a
small dedicated team within each pillar bank in Ireland.
This team would:
• Review rejected SME credit applications for
appropriateness and consistency of decline
decisions, thereby negating the need for an SME to
separately apply to the Credit Review Office.
• Explore the options which exist through the full or
partial use of other government backed schemes
(e.g. Credit Guarantee Scheme / Microfinance
scheme) thereby negating the need for the SME to
reapply to each scheme or fund individually,
completing different forms and providing different
information in each case.
• Reviewing informal applications or enquiries (which
the main banks are now starting to log) which are not
put forward to credit commities by the bank
relationship manager to whom the enquiry was made
and performing follow up satisfaction calls to SMEs
making such enquiries.
17
Some of the banking initiatives recently introduced by
banks in Ireland, partly at the request of the Central
Bank of Ireland and Department of Finance, should be
introduced in Northern Ireland, for example:
• Front line staff training on cash flow lending, SME
funding available, debt restructuring, sustainability
assessment;
• Dedicated distressed credit / challenged units;
• SME coaching initiatives;
• Single application form, standard business plan, cash
flow model;
• Auto grading of micro loans;
• SME feedback initiatives; and
• Dedicated SME officers in 2013.
Whilst not all the banks operating in Northern Ireland
who lend to SMEs are regulated in Ireland, for a
number of them their primary regulator is Irish and they
are supervised under passporting rules in the UK. As
such, some of these schemes could be supported or
encouraged by the Irish Central Bank. However they
represent best practice in dealing with SMEs and
distressed credit and are being rolled out in many
banks internationally and in the UK. This issue has also
been raised in the Review of Access to Finance for
SMEs in Northern Ireland (EAG, 2013).
Consideration should also be given to the development
of international trade finance products for SMEs, i.e.
export-focused guarantee scheme to support lending
under guarantee. We acknowledge that at the date of
publication of this report, this recommendation is being
considered in Ireland by the Department of Jobs,
Enterprise and Innovation.
Recommendation R9 – Further
Development of Credit Review and
Mediation Services
A number of recommendations have been made in a
recent Department of Finance report following an
assessment of the operation of the Credit Review Office
(CRO) (Grant Thornton, 2012). We welcome those
recommendations and suggest that consideration
should also be given to expanding the remit of the CRO
to include:
• Further encouragement of non-pillar banks operating
in Ireland to engage with the CRO.
• Consider the extension of the remit of the CRO
beyond its current brief to include a credit mediation
service following the example of the French credit
mediation office. The French model as (set out in
detail in Section 6) should be reviewed to assess the
benefits of a wider and distributed mediation role for
SMEs.
• Quicker turnaround times as, when an SME has a
credit problem, time is of the essence (the above
mentioned report includes recommendations on
expediting the application process).
• Sample testing of credit applications which have been
rejected by the banks but which have not been
referred by the SME to the CRO. This will over time
improve the quality of credit assessments, encourage
banks to focus more on solutions rather than just credit
decisions and ultimately will provide increased
assurance to SMEs on the robustness of the bank
credit application process. Alternatively banks should
refer a sample of all rejected credit applications across
each sector to the CRO by the participating banks.
• Consideration should be given to adopting a version of
a model similar to that developed and rolled out in the
last 3 years in France. Location of a CRO officer in
each pillar bank on an ongoing basis, so that whilst the
officer is operating independently of the bank, he/she
is none the less working in closer proximity and thus
able to discuss possible solutions with the bank and to
provide sign posting for under funding options.
We recommend that the Department of Finance and
Personnel and the Northern Ireland banks, in
conjunction with the British Banking Association and the
Independent External Reviewer agree an approach to
systematically promote the uptake of the UK Banking
Taskforce Appeals Process by Northern Irish SMEs to
ensure that existing processes are leveraged to the
greatest extent possible. In addition, consideration
should be given to an extended independent mediation
support for SMEs in Northern Ireland which
incorporates some of the benefits of other models,
including elements of the French model set out in
Section 6. This could entail a separate unit which
coordinates access to finance issues for SMEs who
have been refused bank finance but who may also
require specialist advice on their application quality and
improving the standard thereof, advice on capital
structure and financing options and signposting to more
appropriate financing solutions.
18
DEVELOPMENT OF THE VENTURE
CAPITAL AND ANGEL INVESTOR
MARKETS
Recommendation R10 – Continuation
of Government Support for Seed and
Early Stage Finance in Ireland
Consideration should be given to the following in
relation to seed and early stage finance:
• Introducing an investment follow-on fund specifically
targeted at participants of seed programmes.
• Ensuring that an appropriate range of alternative
finance options (as per recommendation R5 above
and based on examples in section 6) is available to
such businesses including entrepreneur loans or
hybrid instruments incorporating debt and
subordinated tranches.
• Targeted venture capital funding, including
consideration of Ireland-only or all-island non-seed
funds, to allow for a lower bar for some emerging
viable seed companies who may not compete at the
international level in terms of follow-on funding. The
five new Enterprise Ireland non-seed funds (Ireland-
only), currently at expression of interest stage, may
address some of these issues, albeit that they are
focused on the broad technology and life sciences
sectors.
• Continued support and assistance to emerging Irish
seed companies in competing for commercial funding
from international venture capital funds to raise the
standard in terms of financial, commercial,
management and presentational skills amongst this
group.
• Consideration may need to be given to addressing
the lack of diversification in seed and early stage
funds (focused primarily on high-tech) to ensure that
potential high-growth companies which are not
necessarily high tech are not dissuaded from the
equity route (self-selecting themselves due to a
perception that the funds are not relevant to their
sector or company type), or otherwise restricted due
to fund restrictions or the specialist focus and
preferences of the VC fund managers. We
understand that Enterprise Ireland is in discussions
with the European Investment Fund in this regard.
Recommendation R11 – Support of
Angel Investment across the island of
Ireland
The establishment of an Irish dedicated co-investment
fund or angel fund should be considered where
investment selection is initially led by the private
investors, who set the terms, but with the remaining
funding provided by the co-investment fund.
We recognise the existence of the Co-Fund NI which
supplied £1.7m in funding to seed and early stage
businesses. Co-Fund NI leveraged additional private
sector investment of £3m in addition to the Invest NI
(INI) portion of £1.7m (2012).
The establishment of a co-investment fund or angel
fund, which has merit in its own right to further promote
business angel investing, may also promote further
diversification where initially led by the private
investors.
The recent establishment of a new all-island food
business angel syndicate may demonstrate potential for
funding of ?non-tech? sectors by equity investment
although it is too early to make any detailed
assessment of the syndicate.
As the visible business angel market in Ireland is small
relative to other countries and due to the fact that
investments through structured vehicles such as the
Seed Capital Scheme (SCS) and the Employment and
Investment Incentive (EII) scheme show a downward
trend in overall investing, consideration should be given
to the following:
• Further promotion and awareness raising of the
benefits of the existing SCS and the EII scheme are
required; and
• Extension of the terms of the EII relief in line with the
more extensive and attractive UK-based Enterprise
Investment Scheme and the Seed Enterprise
Investment Scheme.
Due to the increasing relative importance of business
angels as a source of finance for SMEs and, the as yet
relatively small size of the total business angel market
in Ireland and Northern Ireland, we recommend
continued public funding of both the jurisdictional and
cross-border Business Angel network infrastructure.
19
Recommendation R12 – A Venture
Capital Strategy for Northern Ireland
Echoing the recent Review of Access to Finance for
SMEs in Northern Ireland (EAG, 2013), we recommend
that a comprehensive Venture Capital Strategy is
developed for Northern Ireland which informs and
develops the equity funds under the Access to Finance
Strategy, dovetails with the new Innovation Strategy (to
be published in early 2014) and supports wider policy
objectives to further promote entrepreneurial activity in
Northern Ireland. This strategy should address medium
to long-term considerations including the avoidance of
future gaps in the continuum of funding, an issue which
is likely to have impacted demand and confidence in
equity funding in Northern Ireland. And, in the shorter
term, it should frontload early risk capital initiatives and
associated support services to take into account the
importance role of proof of concept, seed and early
stage capital availability as a demand stimulant.
Two new development capital funds of £30m each were
awarded in 2013 and are understood to be subject to
contract at the date of writing. In early 2013, the Invest
Growth Proof of Concept Fund (pre-commercial grant),
which was fully committed at the end of 2012, and the
Invest Growth Fund were extended by £2m each to
March 2014, with a view to putting in place increased
seed and early stage funding from April 2014.
Recommendation R13 – Investment in
Seed and Early Stage Capital in
Northern Ireland
The extension of risk capital needs to be supplemented
by a range of wider support initiatives to promote
innovation and the entrepreneurial environment and
provide wrap around services to start ups. Despite
acknowledged success of some investment readiness
support programmes, it was considered that further
work was required to simplify and streamline the full
range of supports, promote them in a more
user-friendly and understandable manner, improve the
commercial and management skills of early stage
company teams, and extend the level of support
available recognising that a significant degree of
handholding was required for early stage companies.
Consideration needs to be given to the appropriate
nature and level of wrap-around services appropriate to
an extension of risk capital for seed and early stage
companies to address potential demand side
weaknesses and leverage the benefits of the
investment.
20
2. Introduction
21
This report presents the results of a study into access
to finance for growth amongst SMEs in Ireland and
Northern Ireland. The study, for the first time, examines
not only bank finance but finance available to SMEs
from other sources such as government funding,
venture capital and angel finance.
The study also, for the first time, presents a complete
picture of the supply of finance to SMEs across the
island of Ireland, in particular the supply of bank finance
in Northern Ireland. In Ireland, banks provide supply
side data to the Central Bank of Ireland. However, at
present, no such process exists within Northern Ireland.
This study provides a unique analysis of the total value
of the credit extended by banks in 2012 to SMEs in
Northern Ireland.
This study is an important component in the complete
and rigorous assessment of the current supply and
demand side issues related to bank and non-bank
finance for SMEs trading in Ireland and in Northern
Ireland.
2.1 OBJECTIVES OF THE STUDY
The three main objectives of the study are to provide:
• A review of the current information covering access to
finance for SMEs and, in particular, clarify the balance
between the supply-side and demand-side issues;
• A review of the current supply of various types of
finance for growth (including bank lending, business
angel finance and Venture Capital (VC)) and
assessing the potential for new and alternative ways
of financing enterprise growth; and
• A series of recommendations for the financial
providers, businesses and policy makers with a
particular emphasis on where cross-border
cooperation can deliver mutual gains to Northern
Ireland and Ireland.
2.2 DEFINITIONS USED IN THE
STUDY
The following definitions and explanations should be
considered in the context of the study:
• The study concentrated on direct sources of finance
which include the physical transfer of funds from a
lender or other finance provider to an SME.
• The study excluded detailed commentary on indirect
sources of finance which support SMEs by means of
trade credit, access to staff resources and/or tax
incentives.
• At an overall level, an SME is defined (using the
standard EU definition) as any entity engaged in an
economic activity, irrespective of legal form (i.e.
corporation, partnership, sole-trader, etc.), which
employs fewer than 250 persons and whose annual
turnover does not exceed €50m or whose annual
balance sheet does not exceed €43m.
• The study included companies falling into one of
three categories of SME, as determined by the EU
definition of each category, which can be broadly
summarised as follows:
EMPLOYEES TURNOVER BALANCE SHEET VALUE
MICRO