Mistrust between banks and startups is holding back investment by good SMEs
Fear of rejection appears to be a very potent force in why many small business owners are not even applying for bank loans. Where the owners know their business is in deep trouble and they have enormous legacy debts, then you might think it would be obvious that they wouldn't apply for a loan.
Equally, where banks are not lending out much money to SMEs, then the small business don't apply because they know they would be shot down.
But somewhere in the middle of this post-crash SME debris, is a difference between the perception and the reality. It appears that many Irish SMEs are what can be called "discouraged borrowers".
This is defined as a "good firm requiring finance that chooses not to apply to the bank because it feels its application will be rejected".
An interesting study conducted by Trinity College professor Brian Lucey and colleagues in DCU and Universidad Politecnica de Cartagena in Spain, found that 44pc of Irish SMEs surveyed did not apply for bank finance because of "fear of rejection".
The figure for Germany was just 22pc while in Greece it was 19pc and in Spain it was 17pc.
There may be many reasons why an SME owner believes they won't get a loan, so they don't apply. Equally there may be many reasons why they are not applying for loans at all.
Having come through the economic crash, business people in Ireland seem to be much more risk adverse. The financial wreckage of the crash has still left its mark on both SMEs and banks themselves.
After the excessive lending and borrowing of the boom years, it might seem odd that we should even question why firms are not applying for finance.
The point is that access to finance is the lifeblood of economic growth. Firms need to expand to hire people. In many cases they should borrow money. A lack of investment in the SME sector will hold back the wider economy.
Bad firms whose balance sheets are shot to pieces will not get loans. Good firms may well get them. Some of the good firms may be run by people who just don't like the idea of borrowing money at all.
John Boyle of Boylesports has built up a 200 plus betting chain business without borrowing money. But his is a high turnover, cash business. He isn't waiting two months to get paid.
Other SMEs may be unduly cautious. The fear of rejection identified in the Lucey study was particularly prevalent among newer and smaller businesses. These are the very businesses that could benefit most from a healthy appetite for financing.
Studies show that when things got really bad during the recession most SMEs loan applications were for working capital. Firms were in trouble and they needed the bank to come to rescue. In some cases the banks did, in others they did not.
As the situation in the economy has improved a larger portion of SME loan applications are for growth and expansion, as well as purchase of new vehicles.
The amount of money available from banks to lend has also increased. Despite this, outstanding debt by SMEs has plummeted as businesses pay back more than they borrow in new debt.
Between June 2010 and June 2015 credit outstanding to SMEs fell by about €16bn. New lending to the sector shot up after December 2013 as the economy improved but its rate of growth began to taper off in the middle of 2015.
How much of that growth was lending to farmers for expansion ahead of the end of milk quotas? Quite a lot as lending to the agriculture sector has grown steadily. New SME lending to the business and administrative sector is only running at the same levels it was in the middle of 2010.
Lending to SME manufacturers is up but not that significantly since 2010, while SME construction lending, is well below where it was even in 2010, the year the banks had to be recapitalised to the tune of billions of euro.
The big question here is why are more micro businesses in particular not even seeking loans? If a sizeable number of them believe they will be rejected, why not give it a go anyway? Do they just see it a waste of time? The other big question is, are they right about being rejected?
Loan application rejections from the SME sector have fallen in the last two years. There has been heavy debate about whether banks were massaging the figures by discouraging clients early in the process so they wouldn't even submit an application. This in turn would make the application rejection rate fall.
The National Competitiveness Council found that in November 2015 the interest rate charged by banks in Ireland on loans of up to €0.25m was more than 80pc above the euro area average rate for new business. The rate on loans of up to €1m was more than 60pc more expensive in Ireland.
Central Bank data shows that personal guarantees and collateral still play a huge part in bank finance to SMEs.
Banks are looking for either in about 30pc of SME loans. However, when it comes to newer, smaller micro businesses, personal guarantees are sought in around 33pc of cases.
If a lot of SME lending is going to farming, then farmers will be very reluctant to "bet the farm" by providing collateral or personal guarantees if they want to expand their milk herd.
Yet, despite all of this, the university study is about fear of being turned down for a loan, not having to pay too much money for it.
The figures remain stubbornly high in Ireland for a perception that they will not get the money. Assuming at least some of them are wrong about that, there are plenty of small companies out there, who might be under-investing due to a lack of finance.
And more significantly, they might be under-investing and therefore not fulfilling their financial/employment potential, under a misperception.
Central Bank of Ireland figures show that between April and September 2015 just 20pc of SMEs applied for a loan and about 21pc for an overdraft. It suggested that discouraged numbers were about 9pc for loans and 12pc for overdrafts during that period.
Banks have a part to play in all of this. It might be even in how they get their message across.
Several of them are buzzing about how much they lend to "SMEs and farmers" without stripping out how much is going to small firms that aren't involved in agriculture. They appear to favour particular sectors even though they publicly insist that they don't.
In part the findings of this survey may simply highlight a cultural risk averseness inherent in Irish startups and SMEs.
Filling out a survey about why you didn't apply for a loan, it is easier to say, I didn't think I would get it, than to say, I don't particularly want to grow my business very much and just want to make a decent living.
Certainly there was little shyness about risk during the property boom when taxi drivers, Gardai and so many others were borrowing massively to grow their property portfolios. Cultural aversion to risk was in pretty short supply back then.