SMEs: Thinking small

  • 10-28-2011

Last month, the European Parliament hosted the ‘European SME Week Summit’ in Brussels. The event was conceived as a forum for entrepreneurs to network and for European politicians to outline initiatives for the SME sector. To a large degree, however, it served as an opportunity for business owners to vent their frustration at what they see as the failure of European and national institutions to stimulate a sector that employs three-quarters of the EU’s working population.

The overwhelming issues concerning delegates was a dearth of support from governments in providing finance to start-ups and a lack of action in encouraging venture capitalists to invest in fast-growing SMEs. The rhetorical response from MEPs and commission officials, was that although there are European-driven programmes available, governments must be willing to commit to greater fiscal integration if the EU is to have a telling impact on the growth of small business.

It was in fact rather harshly suggested by commission officials Marco Curavic and Carlo Corazza that Ireland in particular was behaving rather selfishly in regard to its corporate tax rate. The charge that Ireland’s corporate tax is somehow negatively affecting competitiveness in the indigenous SME sector of other EU countries is rather baffling, but it perhaps displays the extent to which greater integration dominates the solutions being proposed within the commission.

Short of drastic pan-European measures, an efficient government guarantee programme to allow banks lend to small business at a lesser risk, was touted as an invaluable implement for stimulating growth. Chair of BusinessEurope, a Brussels-based association of employers, Hugh Morgan-Williams remarked that it is useless pointing the finger at financial institutions.

“We’re in a situation where banks are paralysed by a fear of risk,” he explained. “It’s no use blaming them, if you were a banker you’d be doing the exact same thing. If we’re going to persuade banks to become less risk-averse we need competitive institutions. National politicians must also play a greater role because SMEs are the engine of growth.”

For its part, the Irish Government has imposed lending targets on the two domestic pillar banks, Bank of Ireland and AIB, for the three calendar years, 2011 to 2013. Both banks are required to sanction lending of at least €3bn this year but the most recent report from the Credit Review Office suggested that this target might not be met. The office blamed this on what it termed “subdued lending”, an assertion flatly rejected by the Small Firms Association (SFA) and The Irish Small & Medium Enterprises Association (ISME). ISME says their latest quarterly survey shows that 58% of companies who applied for credit in the last three months were denied.

 Both the SFA and ISME say that greater communication is required between banks and SME owners and that a dedicated SME staff must be appointed in each branch to build trust between businesses and banks.

ISME’s Mark Fielding, for example, says  he believes many people assessing loan applications are not qualified to do so.

“You have yellow packs within the bank, people who have been sucked in to do jobs they're not capable of doing. The old fashioned bankers that are able to assess risk are gone. They've lost the ability to look through your balance sheets and assess risk and ask relevant questions and lend accordingly, or not, as the case may be.”

The Temporary Partial Credit Guarantee Scheme which is due to be rolled out in the coming months proposes to de-risk investments sufficiently for banks to increase their lending capacity. The Government has tasked the design of the plan to a UK-based agency involved with the implementation of similar schemes there.

The Department of Jobs, Enterprise and Innovation says the scheme is intended to target companies that are performing well but cannot secure additional facilities due to insufficient collateral or because their sector is considered too high-risk. Both the borrower and the bank retain exposure in the event of default and the State is exposed only to the portion of the loan guaranteed up to a pre-specified limit.

The Government hopes that the scheme will allow a business to not only acquire a loan it could not otherwise obtain, but also to establish a favourable credit history with a lender so that the business may obtain future financing on its own. 

ISME believes, however, that the plan does not go far enough.

 "It won't be the silver bullet for small and medium enterprises,” says Fielding. “It will help some of them and it will help marginal ones, the ones that are nearly across the line in getting their lending but are falling short let's say on collateral. But we've seen from our own members and from our colleagues in the UK and other jurisdictions that there's a very small number of businesses that it will effect because you really talking about a company that are almost there anyway."

Regardless of the appetite for risk within financial institutions, technology firms in the small enterprise sector have never really been able to rely on the support of financial institutions. Many of the firms are loss-making and their assets come from their people and intellectual property. In that sense, it is understandable that the banks are wary of investment. It has led to the Irish venture capital (VC) industry being closely linked with technology businesses.

Latest figures from the Irish Venture Capital Association (IVCA) show that Irish technology companies raised €161.9mn from investors in the six months to June 2011, an increase of 58% on the same period last year.

The opportunity for investors to engage with emerging technologies is vital for a knowledge-based economy to move from an aspirational goal to a driver of growth. It is in this commercialisation of research that the National Digital Research Centre (NDRC) has shown such success. In its latest annual report the centre showed how NDRC-based technologies secured €4.4mn of third-party investment last year, a ten-fold year-on-year increase.

The NDRC provides a collaborative approach between technology and business by linking academic researchers, industry companies and venture investors.

"What we offer is an opportunity for a joint activity,” says chief executive Ben Hurley. “Where there's the company. There’s ourselves at the NDRC who have the knowledge of the area that can de-risk it. There's the technology partner coming from one of the research labs around the country that is bringing a kind of technology expertise. What these companies can do together is create a really unified and cohesive joint venture, to transform the technology into a product. At that point in time it’s more appropriate and possible for that product idea to attract real venture investment whether that be bank financing or venture investment.”

Developing the VC industry so that it extends beyond the technology industry and begins to have an impact on traditional business was an issue that was discussed at the SME Week. It was noted that in some countries, the VC sector has very little diversity within the SME sector. Maurice Roche, of the Irish Venture Capital Association says this is more or less the case in Ireland.

“We don't have a private equity business like there is in the UK in terms of traditional businesses being managed by us and so on. There is very little activity in that space. It's all about funding technology businesses that require capital to grow and to develop products. The banks funded the other businesses, the retail, services businesses and so forth.”

He continued by saying that, beyond the seed funds created by the pillar banks and managed by VC firms, it is unlikely that the VC sector will begin to exert much of a greater influence on traditional SMEs.

Fielding says that, as there isn’t a history of angel funding in the SME sector, it will take time for things to change but that there is certainly evidence of people moving away from reliance on the bank to bring them over the line at start-up stage.

The Government also has pledged to begin putting money straight into small businesses. The ‘Micro-Finance Fund’ promises to provide small loans up to €25,000 to businesses with up to 10 employees and will be available to all start-ups. The decision on whether it will be a feature of Budget 2012 has not yet been finalised by government

Whether the funding comes from financial institutions, angel investors or government is perhaps immaterial to the relatively large numbers of Irish people who are engaged in start-ups. A recent study by the Global Entrepreneurship Monitor showed that almost one-in-10 Irish people between the ages of 35 and 44 are engaged in the early stages of entrepreneurial activity and that a third of those who started a business last year did so out of necessity. With unemployment remaining stubbornly high, it would be a major error to fail to give support to people who not only create a job for themselves but employ the vast majority of others within the economy.


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