Signs of financial distress appear in late SME payments

An ESRI report led by Martina Lawless estimated that the level of financial distress in SMEs would have been 72pc higher without the nearly €10bn in State wage subsidies

Jon Ihle

March 16 2022 02:30 AM

Late payments are becoming a growing problem for small businesses with more than four in 10 saying the issue is worse than a year ago, according to a new Kantar/Close Brothers survey.

According to the Close Brothers Business Barometer, which surveyed 900 businesses across Ireland and the UK in February, 43pc of SMEs report being “adversely affected” by late payments, which put a significant strain on working capital.

In Ireland, a quarter of those chasing invoices are owed more than €40k, while more than a third are short €21k-€40k.

Nearly half of the companies affected wind up writing off more than 10pc of their annual turnover as a result.

The research comes as Government Covid support schemes are coming to end, withdrawing hundreds of millions in direct subsidies from the sectors hit hardest by the pandemic.

In January an ESRI report led by Martina Lawless estimated that the level of financial distress in SMEs would have been 72pc higher without the nearly €10bn in State wage subsidies since March 2020.

Insolvencies also fell below the “natural” rate during the pandemic, according to the ESRI, suggesting that subsidies might also have masked the true extent of cashflow problems in many businesses. Indeed, the number of SMEs making a loss rose by 50pc in the last two years.

Analysts and industry bodies have warned that latent financial distress may now start appearing among SMEs as they transition to a post-Covid economy disrupted by inflation an energy crisis and rising funding costs.

That has already happened in the UK, where business supports were cut back last September and voluntary insolvencies hit a 60-year high by the end of the year.

Banks, which provided loan forbearance to 10pc of SME customers at the start of the pandemic, are now releasing conservative provisions to boost profits and pay shareholders as economic conditions normalise.

Clearly, not every business will be able to thrive in the new environment, and lenders may not be as forgiving, as the recent receivership of engineering firm Roadbridge indicates.

Separately, the Strategic Banking Corporation of Ireland (SBCI) and Finance Ireland have announced a new €75m discount lending fund for SMEs.

The fund will make finance available to qualifying SMEs at about 1pc below typical rates on comparable commercial loans.

Acting as the on-lender of the state funds, Finance Ireland will offer finance of up to €1m to SMEs, including sole traders and farmers, through hire-purchase agreements, leasing agreements, contract hire agreements, sale and leaseback facilities, and farm loans.

The fund extends a seven-year partnership between the SBCI and Finance Ireland, which has already supported over 4,000 SMEs with more than €125m. Finance Ireland is also in the Government Covid-19 Credit Guarantee Scheme, operated by the SBCI.