Euro NotesSmall businesses are not applying for bank loans and those that are applying are being refused. This is what a survey of nearly 1500 SMEs, released today, commissioned by the Department of Finance and funded by AIB and Bank of Ireland. To be more precise, only 40% of SMEs requested some type of bank loan with a 19% refusal.  You can download the report at the end of this article.

Very few businesses applying for Loans

Over the six months of the survey, Oct 2012 to March 2013, 40% of SMEs requested at least one type of loan facility, which is a slight increase from 39% in September 2012 and 38% in 2011, following the gradual stabilisation of business performance among SMEs in Ireland. When excluding SMEs with seasonal demand for credit, the credit demand is unchanged from September 2012 at 35% but slightly higher than 2011. Albeit, having tougher trading conditions, the overall increase in credit demand over the four periods is mainly driven by Micro sized companies (up to 10 employees) while demand remains relatively steady among Small and Medium-sized companies.

The overall decline rate for the period is 19 per cent, compared to the 23 per cent decline rate for 2012. An increasing proportion of applications are being approved fully, rather than partially approved, said the survey.

There was a 60% approval rate of the SMEs who had applied for credit at the date of the survey. Excluding applications that were still pending, there was an approval rate of 76%.

Micro businesses are the drivers for credit demand, “while demand remains relatively steady among small and medium sized companies,” said the report.

Excluding pending applications, 76 per cent of application requests were granted (74pc in full and 2pc partial), it said.

Is Lending restricted to certain sectors?

The study showed a “significant improvement” in the perception that banks are lending.  47% of respondents said that they believed this to be true, up from 39% last September. However, most of those SMEs believe that lending is restricted to a small number of SMEs in certain sectors, while a “significant minority”, or 6%, haven’t applied for credit at all because they believe the banks aren’t lending.

77% of SMEs who were refused credit facilities did not agree with the reason provided by the bank for the refusal.

21% of SMEs who were refused credit claim that the bank did not provide them with any reason for approval

6% of SMEs surveyed did not apply for credit because they believe the banks are not lending.

16% of companies surveyed indicated they had decreased employee numbers in the period, a fall of 4% from the same period last year.

The report recommends that in order to encourage demand in the future, banks should focus on ensuring that the reasons for decline are clearly understood by the applicant.

Reasons for refusal and conditions

Businesses that were turned down were declined because

  • of a bank-led reason, such as a change in lending policy (33 per cent, up from 28 per cent in September)
  • the bank was no longer willing to lend to that sector (20 per cent up from 14 per cent in September)
  • of inadequate repayment capacity (23 per cent of those whose application was turned down).

The report also highlighted an increase in the conditions attached to loan approvals, with 70% of SMEs having at least one criteria or condition attached to their approval. These conditions included

  • personal guarantees (up to 50 per cent from in 41 per cent in September). I always thought that was higher.
  • specific security (up to 26 per cent from 21 per cent) and
  • a facility fee (up to 26 per cent from 20 per cent).

The recommended time for a bank to give a decision on a loan is 15 days, however, the time during the period of the report was 21 days.

There was a “small concern” identified in the report, that awareness of the Credit Review Office has decreased.

The Minister for Finance, Michael Noonan TD welcomed the report saying it gave further clarity to the pattern of credit demands by the important SME sector,: "The survey findings show that demand for Credit remains relatively soft with 40pc of SME's applying for credit in the last six months. Encouragingly, the survey finds that 74pc of applications were approved in full. Any SMEs who require credit should approach the banks with viable business plans and, if refused, they should avail of the services of the Credit Review Office, which is overturning approximately 55pc of cases referred to them."

"The SME sector is a key driver of growth and jobs across the country and it is essential that SME owners and managers have the confidence in the economy to invest in their businesses. It is clear from the Survey results that SME's decisions to apply for credit are intrinsically linked to the prevailing economic environment in which they are operating. Stability is returning to the economy and we are seeing signs in this survey of stability in SME's turnover. That is why I placed such a strong focus on initiatives to support this sector in Budget 2013 and we will continue to work to support this sector in the months and years ahead."

So there you have it, straight from the horses mouth, I mean the Ministers! Prepare a viable business plan and make your application. Any good consultancy practice like The Synergy Group can help you prepare your plan.

Last July the Central Bank released a report which showed that Irish SMEs faced some of the toughest credit conditions in the eurozone. It also found that the lack of credit stemmed from a reluctance by the banks to lend. The banks rejected the findings and blamed low lending rates on the lack of demand.

Credit conditions remain very restricted throughout the EU as banks continue to reduce their debts in their balance sheets. According to new regulations, banks must increase their capital levels by 2019, which will put further pressure on lending rates.

A Standard & Poor’s report released yesterday, 25th June, found that roughly $4 trillion of corporate debt is expected to mature across Europe by the end of 2017.

You can download the report below, under "Download Attachments".

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