Saturday 26 May 2018

Irish small firms too gloomy to seek loans

Trinity College’s Brian Lucey
Trinity College’s Brian Lucey
Donal O'Donovan

Donal O'Donovan

Businesses here are the most likely in Europe to avoid applying for loans because they believe their application will be rejected.

"Fear of rejection" is a factor in discouraging borrowing by small and medium enterprises (SMEs) across the European Union, according to a study of 6,287 businesses.

Non-application for fear of rejection was: Ireland 44pc; Germany 24pc; Greece 19pc; Belgium 18pc; Austria 17pc; and Spain 17pc, the study found.

It is not a surprise that borrowers here may be debt adverse following the credit bubble and subsequent crash here, according to Brian Lucey, of Trinity College Dublin, one of the authors of the report.

However, if businesses are not taking on debt out of a fear of rejection - including thinking it is a waste of time applying for loans that won't be forthcoming - that is negative for the wider economy. Younger and smaller firms are more likely to feel discouraged from seeking loans, the research shows.

The paper was produced by Brian Lucey, Ciarán Mac an Bhaird of Dublin City University and Javier Sánchez Vidal of the Technical University of Cartagena in Spain.

Other factors turning business off bank debt include the relatively high cost of finance in some EU member states, including Ireland, Brian Lucey said.

Avoiding expensive debt makes sense, if it makes the economics of a project unviable, he added.

However, the report's finding that borrower perceptions are having a significant impact on credit flow in the economy is more worrying, he said. It flies in the face of a popular perception that lack of available credit is hindering the SME sector.

Of the 6,287 small and medium companies interviewed, across nine Eurozone states, firms in Ireland had the greatest non-application rates because of fear of rejection.

That is despite recent initiatives by governments and regulators to relieve perceived blockages to credit.

Borrowing levels remain muted despite banks saying they have funds available to lend to good creditors.

A programme of borrower education and encouragement may be needed to make SMEs operators comfortable with debt, Brian Lucey said.

"People are not encouraged to borrow. Good projects should be funded and equity is expensive, lenders and Governments need to do more to educate firms about credit," he added.

Irish Independent

Business Newsletter

Read the leading stories from the world of Business.

Also in Business