The Changing Financial Landscape for Irish SMEs
For a Food and AgriBusiness company looking to raise finance - now is a great time to be in the market. Lenders have funding available, pricing is relatively attractive and the range and variety of funding options available continue to increase. Identifying what is the most appropriate source of funding for a business is critical and it is increasingly likely to be a blend of bank debt, investor capital or monies raised from alternative sources of finance.
In March 2018, Irish SMEs applications for loans and overdrafts was about half the rate of SMEs in comparator countries. Interestingly, a significant share of Irish firms reporting “sufficient internal funding” as the reason they did not apply for a bank loan (50.3 percent). This correlates with the 56 percent of respondents surveyed in the ifac Food & AgriBusiness Report who did not apply for bank finance in the past 12 months. Department of Finance data shows personal savings are a key source of finance, particularly for micro businesses, while private investment is more common among medium companies. Demand for financing is most common among Medium firms and lowest among Micro firms.
Following a steady decline from September 2013 to March 2016, bank finance rejection rates have begun to gradually increase with SME finance rejection rates at 17 percent as of September 2017.3 Micro firms experienced higher rejection rates for financing rising from 18 percent in March 2017 to 28 percent in September 2017. In contrast, rejection rates among bank applications from Small and Medium firms remain lower at 11 and 15 percent respectively.
So, what are the alternative sources of funding available?
Data from the ECB/EC SAFE data indicates that the average SME maintains a relationship with one or more lenders and most SMEs borrow their debt from their main lender. This may be partly explained by a lack of suitable alternative lenders rather than necessarily strong loyalty to one or more banks. The most mature alternative finance industry when it comes to volume, as well as the diversification of funding options, is in the UK, where more than 10% of businesses are funded through alternative investment and this percentage is growing.
Many Food and AgriBusinesses in Ireland (especially family businesses) have a strong aversion to relinquishing equity from the business. But businesses with 100 percent senior debt are not as attractive to investors and the funding structure needs to be tailored to make a more attractive investor value proposition. The growth of trade finance and the advent of crowd-based funding initiatives are also changing the funding landscape and are becoming more widely used by SMEs.
For SMEs who are looking to secure access to finance, it is important that they are aware of all the options available to them on an ever-increasing menu selection. Lack of awareness about these options may contribute to the reason why Ireland lags other OECD countries in terms of our usage of alternative sources of finance. Investigate the many funding options that are on the market and identify the best partner and finance solution to suit the needs of your growing business.