Mr. A. J. Noonan:

I thank the committee. I am chairman of the Small Firms Association, SFA, and I run my own business, Rhonellen Developments. I am joined by Patricia Callan, director, and Avine McNally, assistant director. It is a great honour as a leader of the small business community to address you today on the important topic of access to finance for SMEs.
The SFA represents 8,000 small businesses throughout the country, all of which are customers in some way of the banking sector. The SFA is the voice of small business in Ireland and internationally, with members and affiliated organisations in all sectors and parts of the country. We specialise in the provision of valuable business-focused advice, developing connections for our members and effective public representation to the Government on small business issues.
Ireland is most definitely a nation of small businesses. Ireland has 200,000 businesses, of which 98% are small. Some 93% are micro-business with ten employees or fewer. They provide 50% of private employment, employing 655,000 people. Each year, in the region of 12,000 new businesses start up. We are a nation of entrepreneurs.
I have never known a business, big or small, to be successful without a bank supporting it. The business community is wide and varied. Its constituent businesses have one thing in common: they need an active banking market. Companies vary in size in the SME sector from tiny to large. Their banking needs vary from their being self-sufficient, in which case they can self-finance projects, to requiring an overdraft simply to exist from week to week, as in the case of some small businesses. Obviously, managing that cross-section of needs brings its own set of challenges for banks.
The SFA’s most recent business sentiment surveyshows that small business sentiment continues to improve, with four out of ten companies predicting their business to be good or very good over the next three months. The survey indicates that the economy has stabilised, business performance is encouraging and companies are looking to the future with an increasing sense of optimism. However, the latest SAFE survey on access to finance for small and medium-sized enterprises in the euro area shows that credit advanced to SMEs remains on a low level. This is both a supply issue and a demand issue. For Irish SMEs, supply of finance is second only to finding more customers as the most pressing issue. Irish interest rates are well above those in competitor economies, such as Germany, and this dampens our members’ international competitiveness.
The SFA itself has recently conducted a business banking survey among a number of member companies, to which 855 member companies responded out of a sample of 3,000. Fifty-five percent of respondents use commercial banks for their working capital requirements, while 40% rely on them for their investment capital needs. Retained profit is the second greatest source of funds in a business, with 49% using that for working capital and 43% for investment capital. This is followed by shareholder investment and loans from family and friends. Just 1% of respondents use venture capital and business angels.
On the availability of finance from commercial banks, 38% of respondents stated they do not need investment capital at present, and 28% do not need working capital. Some 12% of companies stated that the availability of investment capital had decreased over the past year, with 19% reporting a decrease in the availability of working capital. Just 8% reported an increase in the availability of investment capital while 7% reported an increase in availability of working capital.
The cost of finance is increasing, with 29% reporting an increased cost for working capital over the past year and 25% for investment capital, compared with 4% experiencing a decrease. Thirty-one percent of respondents stated that their relationship with their business bank had disimproved over the past year, with 41% stating it had stayed the same and 10% stating it had improved. Eighteen percent did not respond.
The great majority feel that the idea of “relationship” is missing from “relationship manager”. They want a dedicated person to contact who understands their business, communicates effectively and responds quickly. The biggest issues identified are increased collateral required to secure finance and delays in securing credit and investment finance.
On the small business side, we recognise the imperative to upskill business owners in management capabilities, particularly on the financial information they need to supply to the bank. We run training courses to promote programmes, such as ManagementWorks’s Building Financial Capability in SMEs, for all our members on a frequent basis. However, for those already in difficulty who cannot afford professional financial advice, we believe the MABS remit should be expanded to help. This would help business owners to resolve their business issues, including by means of advice and advocacy on dealing with legal, accounting and financial issues concerning business restructuring, including negotiating with creditors and banks. This can be justified as it would save more businesses and the jobs of the people they employ.
The SAFE also shows that nearly 40% of all Irish SMEs do not feel confident in talking to banks and obtaining a bank loan. In other European countries, such as Germany and Belgium, confidence is much higher, at approximately 80% and 70%, respectively. Trust has been broken in dealing with commercial banks, hence the difficulties with small businesses gaining access to EU financial instruments, as these must be channelled through intermediaries, which are the commercial banks in Ireland. We have called time and again for the introduction of a State investment bank that would have as its remit job creation and infrastructure provision. We would welcome new overseas banks in the market to give businesses a choice and enhance competitiveness.
Banking in Ireland has changed dramatically over the past six years. Since the crash, the banking sector has moved from being proactive to being reactive. The next step has to be for banking to move to being active. The challenge as the economy begins to grow in a meaningful way will involve the banking sector being ready and willing to support potential growth.
The banking sector has lost an enormous amount of human resources - bankers who possessed enormous knowledge built up over many years. This is by no means easy to replace. Banks’ credit departments operate in an environment where risk is feared. Bank branch managers and employees need to become active members of their communities once more, attending local business functions and offering their support in rebuilding our towns and rural areas. Traditionally, they have been leading lights of the business community around the country, and we believe they should start again.
SFA members have increasingly been raising the issue of the lack of competition in the banking sector, and increased charges and extra conditions are becoming greater barriers even for growth-oriented small businesses. Why are banking approvals so high, yet draw-downs are running at 60%? Some of the main reasons are confidence and the terms and conditions attached to loan offers. A period of three months is not enough to adhere to a deal. Other factors are the prohibitive cost of funds, the offering of life assurance for astronomical sums, personal guarantees, and general legal operations being onerous and slow. The level of equity in some cases can be impossible to achieve.
What can the banks do to address this? First, a decision must be taken by a bank to lend. Then, when it decides to take on a business or a project, it must be priced at a level at which the promoter is seen to be wealthier at the end of the project than at the beginning. The terms and conditions are really where problems are arising. How can decisions be made based on a three-month offer letter? Are personal guarantees for the entire sum of a project absolutely necessary? The same applies to life assurance for the entire sum. That is before we move on to the legal aspects. Are the hoops being put in front of the business community on the basis that approval figures can be shown to be high and in the belief that there is really never any danger that the funding will be drawn down? This is completely unsatisfactory. There is a need for increased transparency on banking products and greater competition in the marketplace. The SFA has called on the National Consumer Agency to undertake and publish a price survey on the range of business banking products to improve price transparency for small businesses on an ongoing basis, and this should now be done.

Irish SMEs rely heavily on banks as a source of external finance, which makes them vulnerable to developments in the banking sector. Greater diversity in funding is necessary, including Government funding, peer to peer lending platforms, business angels and venture capital.

The Government has a role to play in the relationship between banks and business. Only a small percentage of SMEs make use of Government-related funding sources. One of the reasons for this is a lack of knowledge of existing finance schemes. For example, just 23% of respondents to the most recent Department of Finance-commissioned Red C survey stated they had good knowledge of State-funded supports, with only 25% aware of the microfinance loan fund scheme and 51% aware of the credit guarantee scheme. Let us look at the latter two schemes which were launched with great fanfare but which have been singularly unsuccessful. In relation to Microfinance Ireland, it is essential that it adapt its strategy to communicate directly with potential start-ups through social welfare offices and community enterprise centres, as well as LEOs. Applications should be allowed to be made directly to Microfinance Ireland, rather than having to go through banks and be turned down, and LEOs. The process should be as straightforward and speedy as possible. The levels of risk taken should reflect the additional price being paid for access to this form of finance and, consequently, the risk of higher failure rates should be tolerated.

The credit loan guarantee scheme has been designed in such a way that it cannot be used effectively. Our understanding from the recent meeting of the SFA national council with the Minister for Jobs, Enterprise and Innovation, Deputy Richard Bruton, is that it will take primary legislative change to make it work properly. We ask committee members to use their influence to ensure this is fast-tracked into the Oireachtas legislative programme. This is the key scheme for our members as, if we can get it right, it will allow business to grow and flourish. It will give the banks the necessary comfort to lend to worthwhile projects that lack equity or have had their balance sheets wiped in the past six years, or that are in innovative sectors in which banks do not have the necessary expertise to understand. For the Government, it will allow new companies access to finance which they are being denied. They will generate revenue from it and it will allow companies under pressure to survive. These are the ideals that were espoused on its inception but which have not managed to come to the fore. For the record, there will be failures, but the success rate will more than make up for this. Fanfare is one thing; real action is another.

The SFA continues to press the Government on the EIIS and has made a submission in the Department of Finance’s consultation process. It was formerly known as the BES and provided much needed equity. In 2007 €120 million was provided, which figure last year was down to €12 million.

Our recommendations include the following: a return to the BES as the scheme name, as it would be more recognisable. No one understands what the EIIS is - one always has to say it was formerly the BES. There is a need for enhanced publicity around the availability of the scheme. The only media reporting on the scheme tends to have a negative tilt from the perspective of tax write-offs versus recognising the importance of facilitating equity investment in what are viewed as relatively high risk schemes. In particular, there is a need to promote the family and friends and private placement options, as well as funds option, and to make it easy for companies to use the scheme without having to pay for expensive professional advice.

The scheme's rules should be changed, as follows: there should be a return to a five year, rather than a three year, investment term in order that businesses would have the necessary time to grow sufficiently to be capable of repaying investors. There is a need to remove employment and research and development criteria which complicate the scheme unnecessarily. By definition, if a business grows, these will occur, but it poses unnecessary risk up-front to the investor. There is a need to evaluate the cost-benefits of extending the scheme to other sectors and to examine UK and international models with a view to implementing government risk-sharing models with private investors in similar schemes. This is important to attract non-traditional BES-type investors and, specifically, other small business owners who might be interested in investing in other businesses. An enhanced EIIS is essential to allow business balance sheets to recover and give the equity piece that banks need to make a project work on their side of the equation.

The regulatory environment underpinning peer to peer lending platforms needs to be clarified and developed by the Financial Regulator. Also, the marketplace for crowd funding, business angels and venture capital needs to be improved, with enhanced Government funding acting as a catalyst for private sector investment.

The SFA welcomes the committee’s review of this important topic for small businesses. We hope the outcome will be recommendations for the Government, the banks and the SME sector to deliver an enhanced finance system that will work for all small businesses and the economy in general.

We welcome questions members of the committee may have.