SME Borrowers Like Longer-Term Finance
The Future Growth Loan Scheme and Covid-19 Credit Guarantee Scheme were very popular with micro enterprise borrowers, and the market failure in long-term lending hasn’t gone away, writes
Thanks to Brexit and Covid, business borrower have had a great run in recent years in terms of sourcing loan finance. Discounted state and EU funding channelled through the Strategic Banking Corporation of Ireland to on-lenders proved to be popular with SMEs and farm enterprises. Now, however, that subsidised money well has almost run dry.
The experience of the
Future Growth Loan Scheme (FGLS)
proved there is borrower demand for long-term, unsecured loans at a low interest rate. The FGLS was launched in June 2019 to address the market failure in long-term lending to SMEs for investment purposes, and a recognised underinvestment by SMEs in business development.
Initially making €300m in lending available, the scheme expanded in July 2020 with a further €500m following a rapid uptake.
An important feature of the FGLS for on-lenders such as high street banks was a guarantee element from the European Fund for Strategic Investments. For borrowers, FGLS attractions were loan amounts of €25,000 to €3m; loans unsecured up to €500,000; initial maximum loan interest rate of 4.5%, or 3.5% for loans over €250,000; loan terms of seven to 10 years; and optional interest-only repayment available for up to two years in certain circumstances.
The on-lenders participating in FGLS were AIB, Bank of Ireland, Close Brothers, KBC Bank, Permanent TSB and Ulster Bank. Those lenders reached their Future Growth Loan Scheme capacity at the end of 2021.
In total, 3,480 loans were drawn
to a value of €750m. Of those borrowers, 2,500 are classified as Micro enterprises, i.e. an enterprise that employs fewer than 10 people and whose annual turnover or annual balance sheet total does not exceed €2m. These 2,500 micro borrowers collectively have drawn down €370m in FGLS funding, an average of €150,000 each.
The average FGLS loan amount for ‘Small’ SMEs (i.e. 10 to 49 staff) is €330,000, while ‘Medium’ SME (turnover under €50m) borrowings average €700,000 from FGLS lenders.
The impact and benefits of the FGLS were analysed in 2022 for the Department of Enterprise, Trade and Employment by Oxford consultancy SQW. Their research found that FGLS loan finance has been used by businesses to address specific growth aspirations, with no ‘typical’ activity.
Around half of manufacturing businesses, and over 60% of services businesses, used FGLS to invest in activities such as staff recruitment and training. SQW found that at least a quarter of both manufacturing and services businesses invested in IT, and that investment in developing new or improved products, services
and processes was also common for businesses in these sectors.
Accelerating and catalysing growth was the most cited reason for businesses applying to the FGLS. Consultant Kadriann Deacon commented: “The scheme was seen by both lenders and stakeholders to have filled a genuine gap in the market in relation to the provision of long-term, unsecured lending in Ireland.”
SQW found the key features attracting businesses to the scheme were the interest rate, loan term and unsecured nature of the finance. However, it was the combination of these features that was often crucial rather than one factor alone. A substantial proportion of businesses also highlighted the collateral requirements and repayment period as key differentiators for the scheme, reflecting the importance of the combination of the features in explaining a preference for the FGLS over normal bank loans.
SQW concluded that whilst some deadweight was evident, the absence of the scheme would have meant a lower level of benefit for the economy, and a reported gap for longer-term finance for SMEs unfilled. Lenders reported they had supported businesses via the FGLS that they would not have funded without the scheme, with SQW estimating that around half of the activity supported by FGLS would not have progressed without the scheme.
The SQW assessment also formed the view that there is ongoing strong demand for longer-term lending. The key reason for seeking further finance relate to business expansion, followed by climate mitigation and adaptation for primary agriculture businesses, and R&D/innovation.
“The consistent view was that there remained a significant ‘untapped’ market for longer-term lending given the long-standing challenge of underinvestment by businesses in Ireland,” Deacon commented.
According to SQW’s report, the consistent message from consultations with lenders and stakeholders was the potential benefits from providing a greater continuity and stability of provision going forward. The concept of the FGLS as a ‘facility’ rather than a ‘scheme’ was suggested, as well as a higher level of total financing in response to the high level of anticipated demand.
Banks were forthright with SQW about their attitude. They acknowledge there is demand for a product
‘Half the activity supported by FGLS would not have progressed without the scheme’