On October 10, Paschal Donohoe, Ireland’s Minister for Finance, announced a new €300 million business loan scheme designed to provide competitive financial relief to small and medium sized Irish businesses as they face fallout from the UK’s coming departure from the European Union.
Ireland has a close economic relationship with the UK, and the economic turmoil that Brexit is bringing with it is already beginning to stress small business owners in the country. When the UK actually leaves, a worst case scenario could result in a reversion to World Trade Organization (WTO) rules, resulting in massive tariffs on Irish goods entering the UK. The government’s proactive approach is designed to blunt the economic impact of such an event.
Why focus on SMEs?
Small and medium sized businesses account for 99.8% of all Irish businesses, and produce nearly 50% of the country’s annual GVA. The workers that make up this portion of Ireland’s economy make up 69% of the total workforce. Cash flow problems facing businesses that are closely integrated with UK markets obviously won’t hit all of these businesses directly, but could lead to cascading effects within the country.
Smaller businesses are more vulnerable to cash flow interruptions, and some could be forced to downsize or go out of business entirely as a direct result of Brexit related turbulence. This inevitably results in job loss and reduced buying power within Ireland, which slows the economy further and squeezes other small businesses that rely on domestic markets. This creates a feedback loop that can lead to recession and, in extreme cases, economic collapse. Protecting the most vulnerable small businesses proactively helps to prevent this.
Why SMEs are facing cash flow problems
Ireland exports nearly €14 billion worth of goods to the UK each year, making the them Ireland’s second most significant trading partner after the United States. The UK is also Ireland’s top import partner, with imports valued at over €19 billion. Smaller businesses, who often aren’t as diversely connected as larger enterprises, are being hit especially hard, and can expect tough times ahead as Brexit approaches.
The value of the pound is down
Since the announcement of Brexit, the value of the pound sterling has dropped more than 10% against the euro. This fall in value effectively means a more than 10% drop in the UK’s international buying power, and a far greater portion of disposable income. When Brexit actually occurs, the experts expect a further drop in value, depending in severity on whether it’s a controlled event or the much-feared “hard” Brexit.
Uncertainty about future UK trade regulations
Since business owners have no idea whether the UK will be able to come to a mutually beneficial trade agreement with the EU, they have no clear guide on how to prepare. If no agreement is reached, the UK could simply revert to WTO rules. For some industries, especially agri-food sector businesses, that change could result in prohibitively high tariffs. To stay in business, they would need to find new customers in other countries. Unfortunately, that’s also a gamble, because it would also mean leaving a potentially profitable market.
SMEs need to diversify
For many affected small businesses, the only option is to branch out, build new contacts, and reach into new international markets. This kind of growth and consolidation, however, takes a lot of time, labour, and investment. Worse, coming up with that investment is particularly difficult for those most vulnerable businesses who may already be losing customers in their primary foreign markets in the UK. Many of these businesses need some form of support in order to make the adjustments they need to survive in the new economic environment.
Will €300 million be enough?
Applications for these new small business loans won’t be available to submit until March 2018. Details on which businesses will be eligible, how many businesses are expected to apply, and what limits would apply haven’t been discussed as yet. Considering that there are nearly 240,000 SMEs currently active in the country, it’s unclear whether the funds being made available will be enough to head off any coming crisis.
Fortunately, small businesses do have other financing options to pursue. Fifo Capital and similar financial institutions offer growth-oriented short term funding that’s specifically designed for SMEs. These allow business owners to access stock loans, supply chain finance, invoice financing, and business loans that are specially designed to give small businesses the tools they need to stabilise their cash flow despite tight budgets and turbulent economic environments.