Mr. Aidan Gough:

I am delighted to have this opportunity to discuss our report entitled Access to Finance for Growth for SMEs on the Island of Ireland. As the committee is probably aware, InterTradeIreland was set up under the Good Friday Agreement to exchange information and co-ordinate work on trade and business development. We work primarily with small, micro and medium-sized businesses across the entire island of Ireland. We have engaged with over 25,000 businesses over the past 12 years and have directly supported about 6,000 businesses through grant assistance. We are an all-island body rather than just a cross-Border body. By that, I mean that we operate with businesses in every county across the island.

There are approximately 300,000 small and medium enterprises, SMEs, on the island of Ireland. The well-documented distress experienced by the banking sector has had a powerfully disruptive influence on the wider economy, particularly in the SMEs sector. It has also revealed the complexity of the marketplace that supports finance for growth and has shed light on a number of serious defects in the financial system that supports finance for growth for SMEs. This prompted InterTradeIreland to commission an all-island study looking at the market that supports the supply and demand for finance for growth among SMEs. Our report, which was published in December 2013, seeks to broaden the debate from an important but narrow focus on the supply of bank finance to a more comprehensive and necessarily complex discussion on the availability and use of appropriate financial instruments to support a growing SME economy.

We also have a business monitor which surveys the views of 1,000 businesses across the island on a quarterly basis. We published the monitor for the last quarter of 2013 in January. It showed the most positive set of results we have had in over four and a half years. It showed that close to 50% of businesses were now in growth mode and saying they were in growth mode. This is up from 10% in one year so we are moving into a period where it looks like the economy is starting to grow at the SME level.

I will set out the key findings from the report. For the first time, the report provides a new benchmark for Northern Ireland's credit supply. Northern Ireland did not have a figure for the supply of credit and did not know what the banks were lending because those statistics were not being collected. We worked with the banks in Northern Ireland and got a figure for that, which now sets a benchmark and will, hopefully, be taken forward within Northern Ireland. It estimated that the supply of credit to SMEs in Northern Ireland was about €4.3 billion. The report also emphasises the importance of the demand for finance. We all know the implications of the distress in the banking sector on supply but it also had severe implications for the demand for credit from the SME community. The demand for finance from SMEs is now at its lowest level since data began to be gathered in around 2010.

The report also showed that SMEs in Ireland and Northern Ireland are disproportionately reliant on the banking sector as a source of finance. Almost 93.5% of the finance available to SMEs in 2012 was bank finance, which was a disproportionately high figure compared to any other European country. There is too great a reliance on the banking sector for funds for growing SMEs and there is a lack of diversity in the SME financing landscape. SMEs in Ireland and Northern Ireland are over-reliant on short-term banking facilities such as overdrafts and short-term loans. There is a disproportionate reliance on banks, overdrafts and short-term options.

We also found a substantial legacy of property debt within the SME community. The report showed that about 9% of businesses had legacy property debt and that over a quarter of them said that this was constraining their ability to grow. It was a particular problem for medium-sized businesses. A total of 28% of medium-sized businesses have legacy property debt, which is a substantial proportion of that important sector.

Three fifths of SMEs in the Republic of Ireland and Northern Ireland regard late payments from customers as an issue for them. This compounds the flow of finance within and to the SME community. The problem of late payments creates a vicious cash flow cycle. This problem was greater in the Republic of Ireland.

We also found that the views of banks formed by many SMEs were not based on personal experience and were more likely to be based on media reports and the experience of their peers.

There was a great deal of noise about the availability of finance, but it distracted from the main issues at times. The banks claimed that more than 90% of businesses that applied for loans were successful. However, the business community's view was that the banks were not lending. As such, we recommend that small and medium-sized enterprises, SMEs, in particular make formal applications when approaching banks, as the latter can then be held accountable and the real data can be monitored.

A further matter came to light in the report, in that financial capability was an issue for SMEs. The report found that many businesses' management teams lacked financial skills. InterTradeIreland deals primarily with the smaller end of the market. Many intermediaries, or those involved in advising SMEs, were not even adequately familiar with bank application processes, never mind the other products available to SMEs. There is a problem of capability and information within the financial system. Our survey showed a poor degree of knowledge of the range of supports, including those from organisations and development agencies like us, that are available to the SME community, particularly those that want to invest and grow.

Turning to the recommendations, much progress has obviously been made in developing a broader and more informed financial system that supports the needs of SMEs and, thereby, recovery and growth. Our recommendations focus on three critical areas. First, any market needs a good flow of information, but the flow in this market needs to be improved. I am referring to information on the options and types of support that are available to SMEs. Second, the capabilities of SMEs when making these decisions must be improved so that, given the figure of 93% reliance on bank funding, they do not approach banks only. There are other sources of funding. We have made a series of recommendations on developing the information flow within the system and SMEs' financial capabilities. The hope is that, when information flow and capabilities are developed, demand is created for other sources of products, thereby reducing reliance on the banking sector.

Based on our published research, our advice is that SMEs should plan. We discovered that close to 70% of SMEs did not have business plans. That should be their first action. They should then seek information on what other options are available, for example, equity investment, angel investors - InterTradeIreland is developing an all-island angel investors network - and crowd funders. If they decide to approach banks, they should be prepared. InterTradeIreland does a great deal of work in the equity sector and runs investor readiness programmes. It is important that, when approaching a bank, an SME be prepared, have a plan and explore the options, as the financing need not be a short-term loan or overdraft. I know of a bank in Northern Ireland that offers other products, for example, mezzanine debt products, that may be suitable for companies that have legacy property debts. In this way, SMEs can make informed choices and get the products that suit their investment profiles.