With Brexit just over a year away, Irish small businesses that do business with the UK need access to financing resources to help them manage the coming changes. Since last year, getting that financing has become significantly more difficult for small businesses in Ireland. With fewer individual lending institutions sharing a larger portion of the SME lending market, competition is decreasing, even as demand grows.
Small businesses, unlike their larger counterparts, don’t enjoy a great deal of bargaining power when they’re negotiating for financing, especially when the market doesn’t offer much in the way of diverse options. As a result, small businesses are the first to feel the effects, and in this case that means dealing with rising interest rates.
Small businesses pay more for credit
With most lending institutions, interest rates rise significantly as loans get smaller. This is natural, because larger loans generate more total revenue while requiring a similar amount of work to set up. Recently, however, this difference has grown more pronounced in Ireland, and businesses that have a debt load of less than €250,000 now pay interest rates that are 3 percentage points higher than those that owe €1m or more. To make things even worse, average rates in Ireland are already 2 percentage points higher than in other European countries.
This is the result of a number of factors. Because the lending market is not very competitive compared to other European countries, rates are naturally higher than on the continent. Additionally, small businesses borrowing increased by 24 per cent in the last year as businesses move to prepare for the expected economic impacts of Brexit. That means more borrowers are competing for funds, which naturally drives the cost of borrowing up even further. To bring interest rates back down, the lending market needs to become more diverse, and the supply of funding needs to increase. Fortunately, both of these issues are already being addressed.
Ireland and the EU are moving in to provide support
Irish SMEs aren’t forced to rely on just their traditional sources of financing to prepare for Brexit, and the government has taken some steps to ease the pressure on businesses. The European Investment Fund (EIF) and the Strategic Banking Corporation of Ireland (SBCI) more than tripled the lending capacity of their Competitiveness of Enterprises and Small and Medium-sized Enterprises (COSME) project. This will allow them to fund as many as 10,000 Irish SMEs with an offering of €330 million.
On top of this, the European Investment Bank (EIB) is also working with SBCI to offer a €300 million lending scheme to help Irish SMEs tackle working capital issues. These loans are being offered at approximately 4 per cent interest, making them significantly more affordable than the 5.5 to 6 per cent that Irish small businesses are currently paying.
Besides new loan options, the Irish Strategic Investment Fund is also backing a privately administered investment scheme worth €250 million. This allows small businesses to avoid additional borrowing that they may not be able to afford by providing equity in exchange for funding.
Businesses need alternative solutions
Small businesses are still reliant on traditional sources of credit despite these new initiatives. To ease the pressure on the system, and to encourage lenders to bring interest ratesback down, businesses need additional cash flow solutions to help control demand. Fortunately, financial institutions like Fifo Capital offer tools that can help.
Invoice financing is a way for businesses to essentially borrow from themselves, rather than from a lender. Instead of taking out a traditional loan, businesses trade in an outstanding invoice for most of its value. This allows them to effectively give themselves an advance on their own income, without dealing with the hassle of making payments or worrying about interest rates.
Supply chain finance
Supply chain finance allows businesses to pay their suppliers early or on time without immediately dipping into their working capital. Instead, payments are made from a credit fund that’s provided by investors, and the balance of which can be paid off at a later time. This allows businesses to keep their own working capital stable, while also helping to stabilise their suppliers, and reducing their need for additional financing.
These tools allow businesses to quickly and easily manage everyday cash flow interruptions without turning to traditional loans and relatively expensive, longer term lending. In the current climate, using these tools isn’t just practical, it’s strategic. By doing so, businesses lower their collective demand for funds, easing the pressure on traditional banks, and naturally keeping interest rates lower.