copy the linklink copied!21. Ireland
copy the linklink copied!Key Facts on SME Financing
Irish SMEs account for 99.8 percent of all active enterprises and to just over 68% of those employed.
Debt levels of Irish businesses are declining steadily, and have reduced 43% since 2010, from EUR 27.1 billion to EUR 15.5 billion in 2018.
Gross new lending to core SMEs was EUR 3.5 billion in 2018, representing a 3.2% annual decrease.
Loan approval rates continue to be stable, with 86% of all applications for the period April – September 2018 (excluding “still pending”) either being fully or partially approved.
The interest rate spread of 2.15, between large (2.15%) and small loans (4.3%), remains in line with 2017, when it had fallen for the first time since 2007.
The amount of venture capital raised by Irish SMEs declined in 2018, to EUR 738 million, marking a 26% decrease on 2017 figures. Figures for Q1 2019 show that while there was again a decline in funding raised, in underlying terms there has been an increase in activity, with 75 companies receiving funding in Q1 2019 compared to 43 in the same quarter last year.
Bankruptcies decreased again in 2018 after an increase was recorded in 2017, this continues the trend of overall decline since their peak in 2011. 2018 figures show a 25% decline compared to 2017 figures, bringing bankruptcies down to their lowest level since 2007.
Significant progress has been made towards resolving SME NPLs in recent years and NPL trends continue to move in a downward trajectory.
In order to mitigate the impact on credit conditions in Ireland due to uncertainties surrounding Brexit, the government has sought to introduce various mitigation measures for SMEs, including the Brexit Loan Scheme. While not targeted specifically at those impacted by Brexit, the Future Growth Loan Scheme and the Business Finance Advisory Hub also aim to aid viable SMEs access appropriate credit.
Some of the main policies introduced to encourage access to credit for small and medium businesses include:
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The Supporting SMEs Online Tool, a cross-government initiative, where small businesses receive a list of available government supports based on their responses to a short questionnaire.
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The Strategic Banking Corporation of Ireland, an initiative designed to increase the availability of funding to SMEs at a lower cost and on more flexible terms than has recently been available on the Irish Market.
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The Credit Guarantee Scheme which encourages additional lending to small businesses by offering a partial government guarantee to banks against losses on qualifying loans to eligible SMEs.
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The Microenterprise Loan Fund which provides support in the form of loans for up to EUR 25 000, available to start-up, newly established, or growing micro enterprises with viable business propositions employing less than 10 people.
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The Credit Review Office which helps SME or Farm borrowers who have had an application for credit of up to EUR 3 million declined or reduced. The Credit Review Office also examines cases where borrowers feel that the terms and conditions of their existing loan, or new loan offer, are unfairly onerous or have been unreasonably changed to their detriment.
copy the linklink copied!SMEs in the National Economy
SMEs are a vital component of the Irish economy, as they comprise 99.8% of active enterprises and 68.4% of all persons engaged. Large enterprises make up the remaining 0.2%, these are mainly made of Foreign Direct Investment companies who employ the remaining c. 31% of those engaged in enterprise. SMEs generated 50.2% of total turnover in the business economy and almost 40.5% of gross value added in 2016, the latest year figures available for Ireland.
copy the linklink copied!SME Lending
Gross new lending to core SMEs again reduced to EUR 3.5 billion for 2018, a 3.2% decrease from 2017, driven by falls in the manufacturing, wholesale, retail, trade and repairs, and primary industry sectors.
Source: Central Bank of Ireland SME Market Report 2019
copy the linklink copied!Credit Conditions
The Irish Department of Finance conducts an SME Credit Demand Survey biannually of over 1500 SMEs, to identify what credit issues they experience. The results from these surveys provide important information on the financial issues and challenges facing Irish SMEs.
The latest survey, covering April to September 2018, shows that SME demand for credit decreased to 20% in 2018 while, of those SMEs that did not access credit, 89% cited a lack of credit requirements as their reasoning.
Note: Base for survey: all SMEs (1 505)
Source: SME Credit Demand Survey, April – September 2018.
The average cost of credit reported on outstanding loans has continued to decline, at 4.4% it is down from 5.1% in September 2017. Four out of 10 respondents stated they were not aware of the interest rate attached to their outstanding loans. Interest rates in Ireland are higher than the European average, however the survey shows that only 1% of respondents reported cost of credit as their reasoning for not seeking it.
76% of all SME credit applications were fully or partially approved at the time of surveying. Drawdowns continue to increase with 73% of respondents reporting that they have availed of their full credit facility, a significant increase compared to 60% in September 2017.
The Central Bank of Ireland reported that to the end of Q4 2018 the outstanding stock of Irish SME credit was EUR 23.5 billion, of which EUR 15.5 billion was core SME credit, which is defined as SMEs from non-financial and non-property related sectors. This continues the steady decline of the outstanding stock of core SME credit, which has reduced by 43% since 2010.
copy the linklink copied!Alternative Sources of SME Financing
Equity Finance
Data for venture capital was provided by the Irish Venture Capital Association (IVCA) and includes both funding by business angels as well as venture capital funds. As shown in the below table, while there was significant growth throughout 2016 (70.1% year-on-year increase), and moderate growth continued in 2017, there was a c. 26% decrease in venture and capital funds in 2018. However IVCA noted that while venture capital funding fell again in Q1 2019, down 41% compared to Q1 2018, when two large 2018 deals, worth €100 million, are stripped out then core growth across all deals was almost 50%. There has also been an increase in activity, with 75 companies receiving funding in Q1 2019 compared to 43 in the same quarter last year.
Note: Funding from business angels and venture capital funds
Source: Irish Venture Capital Association (IVCA).
StatLink https://stat.link/https://doi.org/10.1787/888934116984
Business Angel Investments
Business Angels are becoming increasingly important to the funding eco-system for SMEs in Ireland. Halo Business Angel Network (HBAN), a joint initiative of Enterprise Ireland and InterTradeIreland, is responsible for the promotion of business angel investment in both Ireland and Northern Ireland. HBAN actively works to increase the number of angel investors involved in early stage investments and supports the formation of new and existing angel networks, both regionally and internationally, and within industry sectors. Over € 9.3 million was invested across 44 deals in start-up and early-stage companies in Ireland in 2018.
copy the linklink copied!Other Indicators
The Central Bank of Ireland SME Market Report 2019 shows that while the level of Irish SMEs in default as of June 2018 is 17.5%, the share of SMEs transiting into default during the period December 2017 to June 2018 was 2%. It can also be seen that there was variance across sectors, from as high as 4.7 per cent in the Professional, Scientific and Technical sector and 3.6 per cent in Accommodation and Food sector to as low as 0.01 per cent in Mining & Quarrying and 0.9 per cent in the Human Health sector.
Corporate bankruptcies in Ireland are dealt with under three different processes: liquidation, examiner-ship and receivership. In Ireland the figures provided are from insolvent company liquidations.
A company may be liquidated by:
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Resolution of the members of the company following a declaration of solvency;
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A resolution of the members ratified by the creditors; and
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An order of the court.
Bankruptcies in Ireland decreased by c. 25% in 2018, to their lowest level since 2008, and a return to the continuance of a downward trajectory, after an increase figures was recorded in 2017.
Source: Department Business, Innovation and Enterprise, 2018.
The SME Credit Demand Survey indicates that there was no major change in business to business payments since September 2017. 86% (+2%) of all SMEs felt that the average number of days it took to pay suppliers remained unchanged, while 7% suggested that the payment period had increased, and the same proportion said that they paid suppliers faster than before.
Note: Base for survey: all SMEs (1 505)
Source: SME Credit Demand Survey, April – September 2018.
copy the linklink copied!Government Policy Response
Government policy since 2011 has been focused on ensuring that all viable SMEs have access to an appropriate supply of credit from a diverse range of bank and non-bank sources. In this regard, the Government has developed a number of initiatives to ensure that the supply of credit in the market is sufficient to meet the existing and future funding needs of SMEs. Ireland has witnessed an improvement in access to finance for SMEs, however, the uncertainty of Brexit continues to be a significant concern. The Government introduced the Brexit Loan Scheme in 2018 and a Future Growth Loan Scheme was launched in March 2019 to provide longer term funding of 8–10 years, which is currently not available in the Irish market. A Business Finance Advisory Hub is also being developed. These Government policies aim to support the Irish SME and farm sectors and mitigate against Brexit and uncertainty caused by the wider international economic climate.
The Credit Review Office
The Credit Review Office was established in 2010 to help SME or Farm borrowers who have had an application for credit of up to EUR 3 million declined or reduced by participating banks, and who feel that they have a viable business proposition. The Credit Review Office also looks at cases where borrowers believe that the terms and conditions of their existing loan, or loan offer, are unfairly onerous or have been unreasonably changed to their detriment. This is a strictly confidential process between the business, the Credit Review Office and the bank.
The Credit Review Office received 958 formal applications to end 2018. Of these, 658 have reached final conclusion, with the Credit Review Office upholding appeals in favour of 372 borrowers, including those with a commitment to reassess the lending in the future if agreed performance hurdles are met in the short term. The upheld appeals resulted in EUR 52.9 million in credit being made available to SMEs and farms, helping to protect/create 3,694 jobs.
SME Online Tool
In March 2019, the Department of Business, Enterprise and Innovation upgraded and relaunched the SME online tool. The campaign is a cross-governmental initiative developed to help small businesses and entrepreneurs engage with the full range of potential Government supports available to them.
Supportingsmes.gov.ie is designed to assist small businesses and entrepreneurs find information on over 170 Government supports which they may have access to. On answering a short questionnaire, the tool generates a customised list of supports tailored to their business requirements, with further information and contact details for each support available. New features include an SME events calendar, a latest news feature on supports and relevant agencies, and an upgraded search function, which delivers greater accuracy and better presentation of the supports relevant to business.
20,192 businesses and entrepreneurs used the Government’s Supporting SMEs Online Tool in 2018, with over 98 percent of them using the Online Tool for the first time. In that year 70% of visits were referrals, 23% direct visits and 7% by organic search. 82.3% sessions in 2018 were from Ireland and 4.2% from UK.
SBCI
Established in 2015, the Strategic Banking Corporation of Ireland (SBCI), is Ireland’s National Promotional Institution. The SBCI’s goal is to increase the availability of appropriately priced, flexible funding to viable Irish SMEs. The strategic mission of the SBCI is to deliver effective financial supports to Irish SMEs, and in time, other sectors, to address gaps and failures in the Irish credit market, while encouraging competition and innovation and facilitating the efficient use of available EU resources. The SBCI achieves this through the provision of low cost liquidity and risk-sharing activities supporting the provision of appropriately priced, flexible funding to SMEs.
To the end of December 2018, the SBCI supported lending activity through the provision of EUR 900 million in low cost liquidity to 21,783 Irish SMEs supporting 141,658 jobs. Under the SBCI’s risk sharing schemes, EUR 152 million has been drawn down by 4,278 SMEs supporting 6,572 jobs. In 2018, the SBCI lent EUR 123 million to 3,038 SMEs. The average interest rate on SBCI loans was 4.4%. The SMEs who have received SBCI finance are from a variety of business sectors, with agriculture representing the largest sector.
The SBCI uses an on-lending model; not providing funding directly to SMEs but operating through partner finance providers, known as on-lenders. At present the SBCI has 6 on-lending partners, 3 bank and 3 non-bank. In 2018, the SBCI increased the wholesale liquidity funding that it has provided to its non-bank on-lenders and provided an additional EUR 75 million facility to Finance Ireland and EUR 25 million to Bibby Financial Services Ireland.
The SBCI’s risk sharing capability and products were developed further with the launch of the Brexit Loan Scheme in March 2018, and the launch of the Future Growth Loan Scheme in April 2019.
Brexit Loan Scheme
A EUR 300 million Brexit Loan Scheme was launched in March 2018 by the Department of Finance, the Department of Business, Enterprise, and Innovation, and the Department of Agriculture, Food, and the Marine; it is operated by the SBCI. The Brexit Loan Scheme is also supported by an InnovFin Counter-Guarantee Facility provided by the European Investment Fund (EIF). The purpose of the Scheme is to assist Brexit Impacted Irish SMEs adapt their businesses and innovate in response to Brexit.
The Scheme is offered through participating finance providers: Bank of Ireland, Ulster Bank and AIB. These finance providers were appointed to deliver the scheme following an Open Call process run by the SBCI in late 2017. There is a two-stage application process. First, businesses must apply to the SBCI to confirm their eligibility for the scheme. Second, loans are subject to the finance providers' own credit policies and procedures. As part of the process, businesses must submit a business plan.
The scheme is open to all SMEs and mid-cap companies with less than 499 employees that are vulnerable and exposed to the impact of Brexit. Due to InnovFin conditions, the scheme is not available to primary producers in the agricultural sector or to the aquaculture sector. Loans provided under the Scheme are between EUR 25,000 and EUR 1.5 million with a maximum interest rate of 4%, a meaningful reduction compared to the current cost of credit for SMEs. In addition, loans below EUR 500,000 do not require security.
The Brexit Loan Scheme will operate until March 2020, or until it has been fully subscribed. From the launch of the scheme on 28th March 2018 to 10th May 2019, the SBCI received 614 applications. Of these, 557 have been deemed eligible and can proceed to one of the participating finance providers, 124 SMEs have progressed to sanction at finance provider level to a total value of EUR 27,768,800.
Future Growth Loan Scheme
Announced as part of Budget 2019, EUR 300 million Future Growth Loan Scheme has been developed in conjunction with the EIB Group. The Scheme has been developed in cooperation with the Department of Business, Enterprise, and Innovation, the Department of Agriculture, Food, and the Marine, the Department of Finance and the SBCI. The objective of this Scheme is to provide long-term financing strategic investment finance support to Irish businesses to help them invest in a post Brexit environment.
This Scheme provides financing for long term investment in process and organisational innovation, and investment in tangible and intangible assets on agricultural holdings linked to primary agricultural production. There is an absence of long-term financing options for SMEs in the Irish market, research indicates that loans for terms beyond seven years are not available for businesses, which is a clear market failure.
The SBCI is providing an 80% guarantee with the aim of increasing the risk appetite of finance providers. This guarantee is offset by a 64% bespoke counter-guarantee facility from the EIF. The Scheme is open to all SMEs and small mid-caps (businesses of up to 499 employees) including the primary agriculture and the seafood sector. Loans under the scheme will be for terms of 8-10 years. For SMEs, the minimum loan size will be EUR 100,000, and for primary agriculture, the minimum loan size will be EUR 50,000. The maximum loan size under the scheme will be EUR 3,000,000. Loans of under EUR 500,000 will be available on an unsecured basis. The scheme will operate under the General and Agricultural Block Exemption Rules on state aid.
The Scheme was launched in March 2019 and is expected to run for three years through participating finance providers on a first come first served basis, subject to eligibility. While this scheme will be an important support for Brexit exposed businesses, applications under the Future Growth Loan Scheme do not require businesses to demonstrate their exposure to Brexit.
Ireland Strategic Investment Fund (ISIF)
The Ireland Strategic Investment Fund (ISIF) invests on a commercial basis in a manner designed to support economic activity and employment in Ireland. To ensure efficient delivery of funding to the SME sector, the support of which requires large volumes of granular debt and equity investments to be made in underlying SMEs, the ISIF will generally target investment in private sector entities that interface directly with those SMEs. Programme terms are flexible, once the underlying requirement that the funding is provided on a commercial basis is met. The following ISIF commitments have been made to date:
Enterprise Ireland
Development Capital Scheme
The Development Capital Scheme is designed to address the funding gap for mid-sized, high-growth, indigenous companies that have significant prospects for job and export growth. In 2012, the government allocated EUR 50 million of Exchequer funding with the intention of leveraging a further EUR 100 million of private sector investment. Extended in December 2012, the scheme was allocated an additional EUR 25 million. This allocation was targeted to leverage a further EUR 50 million from the private sector over the duration of the scheme, making a total of EUR 225 million in funding available.
This target has been exceeded and there are now three funds actively investing in the Irish market – MML Capital Ireland, BDO Development Capital Fund and Cardinal Carlyle Ireland Fund. The Funds are managed by private sector fund managers, who make their own commercial investment decisions in the context of an agreed upon investment strategy. The Funds typically invest between EUR 2 to EUR 10 million in equity, quasi equity and/or debt. Enterprise Ireland (EI) can commit up to 50% of total Limited Partner (LP) funding to a single fund. EI will invest on a pari passu basis and according to the same commercial terms as private sector LPs. A minimum of two times the amount of EI’s committed funds must be invested in Irish companies by the fund managers.
Enterprise Ireland Seed & Venture Capital Scheme
The objective of the Enterprise Ireland Seed & Venture Capital Scheme 2013-18 is to support the development of high-growth Irish companies that have the potential to create jobs and generate large amounts of additional exports. The government has committed EUR 175 million to the Seed and Venture Capital Scheme 2013-18, and plans to leverage an additional EUR 525 million from the private sector for investment in high potential start-up and scaling companies. All funds are independently managed by private sector fund managers who make the decisions regarding equity and quasi-equity investments.
EI can commit up to 50% of total LP funding to a single fund and will invest on a pari passu basis, according to the same commercial terms as private sector LPs. A minimum of two times the amount of EI’s committed funds must be invested in Irish companies by the fund managers.
As of May 2019, EUR 151 million had been allocated through 3 separate competitive calls in 2013, 2015, and 2017. EUR 99.5 million was committed as part of the first call targeting Series A (post-seed) funding. From this five new Funds have now been established and EI has committed a total of EUR 80.5 million. Under the second call, a further EUR 65 million was committed to a number of venture capital funds targeting early stage companies. Four new Funds have now been established as part of this second call with an Enterprise Ireland commitment of EUR 41 million. Under the third call, EUR 44 million of funding was committed to a number of venture capital funds, two of which have recently launched with an EI commitment of EUR 20 million. Additionally, an allocation has also been made to the new European Angel Fund (Ireland).
In February 2019, EI issued a call for Expressions of Interest under the new Seed & Venture Capital Scheme 2019-24. Under the first Call of the new Scheme, EI is seeking to invest up to EUR 100 million in commercially focused Venture Capital funds. This first call will target three distinct areas of the market and EI will seek to make commitments to funds later in the year. The areas addressed are Seed, Series A+ and the Food sector.
Innovation Fund Ireland
Innovation Fund Ireland is a Government initiative designed to attract leading international venture capital fund managers to Ireland. Innovation Fund Ireland has been created to increase the availability of risk capital for early-stage and high-growth companies. The main objectives of Innovation Fund Ireland are to:
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increase the number and scale of innovation driven and high-growth businesses in Ireland;
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increase the availability of smart risk capital for early stage and high-growth companies;
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attract top-tier venture capital fund managers to Ireland;
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attract, leverage and develop entrepreneurial talent.
Innovation Fund Ireland works in partnership with EI and ISIF. Both, EI and ISIF provide EUR 125 million in funds and make commitments to international Venture Fund Managers. EI will invest on a pari passu basis and according to the same commercial terms as the private sector LPs. An equivalent amount of EI’s committed funds must be invested in Irish companies by the fund managers. Approximately EUR 80 million has been committed to four funds which are actively investing and have completed their investment cycle. These funds are Sofinnova Ventures, Arch Venture Partners, Highland Capital Partners Europe and Lightstone Ventures. At present, further investments under this programme are unlikely and no budget has been prepared to facilitate this. Since the establishment of Innovation Fund Ireland, the ISIF has been established under a statutory footing and invests in overseas VCs under the same conditions as EI under this scheme.
Microenterprise Loan Fund
The Microenterprise Loan Fund was established to lend between EUR 2 000 to EUR 25 000 to viable micro-enterprises with commercially viable proposals in order to sustain and create jobs. Microfinance Ireland (MFI) was set up to administer the Fund on behalf of the Minister for Business, Enterprise and Innovation. Businesses can apply for an unsecured loan of between EUR 2 000 and EUR 25 000 for working capital, equipment, start-up costs, or marketing purposes. The loan term is typically 3 years for working capital purposes and can be extended to 5 years for capital expenditures. Interest rates range between 7.8% and 6.8% for Local Enterprise Office clients. From the 1st Oct 2012 to 31st March 2019, the Fund approved loans to 2,065 micro-enterprises for a total value of EUR 29.6 million. These funds supported 5,028 jobs.
Credit Guarantee Scheme
The Credit Guarantee Scheme was launched in October 2012, to facilitate additional bank lending to eligible SMEs. The Credit Guarantee Scheme offers State guarantees of up to 80% on loans ranging between EUR 10 thousand and EUR 1 million in value and are provided to banks against losses on qualifying loans to firms who would otherwise have difficulty getting credit.
The Credit Guarantee Scheme is open to SMEs, however the aquaculture, primary agriculture, financial services, education, insurance services, property owners and investment industries sectors are not eligible.
Reforms to the Scheme were provided for in 2016, amending primary legislation. This legislation allows new products to be rolled out by the SBCI in from 2018 onwards, including the extension of the Scheme to cover loans other than traditional bank loans (i.e., invoice discounting, factoring, lessors etc). The revised scheme was launched in July 2018 and provides:
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An increase in the level of risk the State will take from 75% to 80% of individual loans
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An extension of the scope to cover other financial product providers, like lessors, invoice discounters etc.; and
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An extension of the definition of loan agreements to include non-credit products and overdrafts.
The legislation underpinning the revised scheme also empowers the Minister to give counter-guarantees that will enable the SBCI (in their capacity as a National Promotional Financial Institution) to unlock matching guarantee facilities from EU sources and thus better share risk across banks, the Minister and the EU. This counter-guarantee would operate in conjunction with the optimal leveraging of EU financial instruments in this area, such as the European Programme for Competitiveness of SMEs (COSME), the Horizon 2020 funding earmarked for SMEs and the European Fund for Strategic Investment administered by the European Investment Bank and European Investment Fund (often referred to as the “Juncker Plan").
The SME borrower pays an annual premium (currently 1%) to the Government in addition to the interest rate/fee charged by the bank.
Since the Credit Guarantee Scheme became operational in October 2012, 669 facilities totalling EUR 107 million have been sanctioned which have helped to support 4 733 jobs.
References
Central Bank of Ireland, SME Market Report 2019: https://www.centralbank.ie/docs/default-source/publications/sme-market-reports/sme-market-report-2019.pdf?sfvrsn=9
Central Bank of Ireland, Trends in Business Credit and Deposits: Q4 2018: https://www.centralbank.ie/docs/default-source/statistics/data-and-analysis/credit-and-banking-statistics/business-credit-and-deposits/trends-in-sme-and-large-enterprise-credit-and-deposits-q4-2018.pdf?sfvrsn=5
Credit Demand Survey, April – September 2018: https://www.gov.ie/en/publication/1ba286-sme-credit-demand-survey-april-2018-september-2018/
Credit Review Office, The Credit Review Office Twentieth Report, 2019: https://www.creditreview.ie/publications/
Central Statistics Office, Structured Business Statistics 2016: https://www.cso.ie/en/releasesandpublications/er/sbs/structuralbusinessstatistics2016/
Department of Business, Innovation and Enterprise: https://dbei.gov.ie/en/
Enterprise Ireland, https://www.enterprise-ireland.com/en/funding-supports/
Ireland Strategic Investment Fund
Irish Venture Capital Association, http://www.ivca.ie/
SCBI, Strategic Banking Cooperation of Ireland, https://sbci.gov.ie/for-sme-advisors/products-2
Metadata, Legal and Rights
https://doi.org/10.1787/061fe03d-en
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