One third of Irish SMEs are now completely debt free
Irish SMEs may enjoy better financial health than feared with one-in-three businesses completely free of debt.
But the bigger the business the greater the likelihood it's heavily in debt.
That's according to new research from the Central Bank that shows debt is highly concentrated in sectors such as hotels, while many business areas are characterised by low debt to turnover levels.
The research is based on data from surveys of companies by Red C in 2012 and 2013, specifically focusing on debt to turnover ratios.
Based on those surveys researcher Fergal McCann at the Central Bank says that most Irish SMEs have relatively low debt to turnover – only 16.3pc of businesses have a debt to turnover greater than a third – meaning that total debt is less than a third of the total annual revenue.
The report shows that just 7pc of companies have debts greater than their annual turnover and only a small percentage owe sums greater than a year's revenue.
The debt to turnover ratio is not a standard business measure of indebtedness, but the study authors say their research indicates that the higher the ratio the greater the likelihood of default, although low debt ratios do not necessarily mean a business is in strong financial health.
While most small firms have debts well below their turnover level, the picture is uneven across sectors.
Hotels and restaurants are the most indebted sector, based on the debt to turnover ratio, while services sector firms and, somewhat surprisingly, builders are least indebted.
But, at the end of last year almost one in three SMEs were behind on their debts, "indicating significant distress in the sector," the report said.
And the least indebted businesses are likely to be small operations with few employees, with bank borrowing concentrated among bigger SMEs.
Worryingly, the bigger the business and the more people it employs the greater the likelihood it is heavy indebted.
More than one-in-ten businesses employing between 50 and 249 people owe more than a full year's takings, the report shows.