Irish SMEs need to address ‘investment gap’ by Mark O’Rourke
Irish SMEs need to address ‘investment gap’ if they are to weather turbulent economic environment
by Mark O’Rourke
With considerable uncertainty persisting in the global economic and political environment, the rise in insolvencies so far this year in 2023, and the return of the 13.5% VAT rate in the hospitality sector, it is understandable that Irish SMEs are precarious about their outlook. Despite this, however, Irish businesses are remaining positive and pragmatic when it comes to their growth and investment intentions for the rest of 2023 and into 2024.
Recent research by Bibby Financial Services echoes these wider economic indicators. Our 2023 Global Business Monitor shows that overall, Ireland’s outlook remains positive despite high prices and interest rates continuing to drag on growth. At 90% on a measure of confidence, Irish SMEs are, alongside Germany, the most bullish of nine countries surveyed about their business prospects. This confidence doesn’t, however, extend to the global economic environment, with half of Irish SMEs (51%) believing the global economic conditions are worse now than during the pandemic.

The good news is that growth feels achievable to Irish SMEs, with 72% saying they expect sales to increase in the next six months. They see attracting new customers (67%), building new supplier relationships (36%), taking on new staff (24%), renegotiating with existing suppliers (23%) and exploring new distribution channels (21%) as the key opportunities for the year ahead.

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Not surprisingly rising costs and inflation were the top two concerns – at 64% each – followed by energy costs (62%), supply chain pressure (30%), interest rates and the cost of borrowing (27%), and the conflict in Europe (24%). As a result, Irish businesses are taking measures to navigate cost increases and inflation, with 57% increasing prices to customers, 38% reviewing their supply chains for efficiencies, and 14% freezing recruitment plans. Furthermore, a reduction in suppliers is also putting a strain on costs for Irish SMEs, for whom 34% of their suppliers have entered administration in the past 12 months.

Further good news is that 88% of resilient Irish businesses say they intend to invest an average of €108,850 this year. Areas they are looking at include marketing and sales (37%), staff training and development (34%), and new staff recruitment (23%). These top three investment areas show that Irish businesses are prioritising the quality and retention of their employees, investing in hiring the best and upskilling those within their business.

Although there is a number of challenges and concerns facing businesses today, Irish SMEs still have their employees, their customers and supply chains at the heart of their operations. While 14% of businesses are intending to freeze recruitment as a way of coping with cost increases, more than half (57%) are also intending to invest in their staff this year, showing that Irish businesses acknowledge the role their employees play in their growth, and vice versa.

Unfortunately, these investment plans may be hindered by cashflow and bad debt issues as three in 10 businesses say they had to write off bad debts in the past twelve months. The average figure written off was €21,076, up from €18,543, in the past 12 months, and jumps significantly for the wholesale sector, which records the highest average amount written off at €47,000.

57% of Irish SMEs have also reported that it is taking longer for customers to pay them, an increase of 14% since last year. As a result, it is no surprise then that cashflow is an issue for companies, with over one fifth of companies saying they don’t have the cashflow they need to grow and almost half of Irish SMEs saying they are more likely to use external finance since Covid-19.

Unfortunately, many business owners are often unaware of the broad range of funding options available to them as they wait for customers to settle outstanding amounts. The traditional banking landscape has changed dramatically over the past few years and while Irish banks were once the mainstays of finance providers for Irish businesses, there is now a significant range of alternative financial institutions who offer a host of reliable solutions.

Financing and investment are critical to Irish SMEs’ success and the withdrawal of Ulster Bank and KBC from the Irish banking market this year has had a subsequential impact, unlocking opportunities for other financial service providers to welcome new customers and allowing SMEs to sit down and properly consider the financial options available to them to set themselves up for success. What is very clear across all markets is that SMEs need all the support they can get from both the private and public sectors. Such funding is vital to ensure businesses can deal with the range of issues facing them such as inflation and supply chain disruptions as well as offering them the opportunity to invest and grow. Alternative finance options, such as invoice finance, are now playing a more important role in a sustainable funding landscape.

As alternative funding solutions provide certainty of payment and more sustainable sources of liquidity, they are often far more suited to the needs of an SME than traditional lending options. They also don’t involve borrowing any money, which is often a key factor for SMEs as they simply don’t want to take on term debt or cash flow loans that will result in monthly repayments for years to come. This hesitancy to take on debt is creating what we are calling ‘an investment gap’ at SME level in Ireland. This is resulting in a barrier to growth for Irish SMEs and what many companies don’t realise is that alternative funding solutions can help SMEs to overcome this barrier.

The recent research by Bibby Financial Services also noted that those considering Invoice Financing has risen by 5% to 21%, showing that more long-term sustainable forms of finance are being sought by business owners. Unlike a loan or overdraft, Invoice Finance does not involve ongoing monthly repayments.

This revolving credit option means that once customer invoices are paid, you can continue the cycle – upload new invoices, draw down, use the funds and simply repeat.

The benefit is that businesses can access multiples of the funding required, compared to a fixed line of credit. This funding option is suitable for a variety of sectors and a wide range of funding scenarios including cashflow funding, new equipment purchase, growth and expansion, management buy-ins and buy-outs, refinancing, corporate restructuring and mergers and acquisitions.

At Bibby Financial Services Ireland, exclusive partnerships with key partners have ensured that SME financing is as accessible, flexible and affordable as possible. This includes a long-term relationship with Strategic Banking Corporation of Ireland, a state backed agency, offering discounted Invoice Finance to qualifying Irish businesses. Over €70m has been made available in funding to Irish SMEs through this partnership.

To address this investment gap, a strategic alliance exists between Bibby Financial Services and PTSB to offer their customers Invoice Finance services designed to fund working capital, improve cashflow and support growth ambitions. This relationship between one of Ireland’s leading retail and SME banks and a specialist lender is one of the first of its kind in Ireland and opens up this option to even more Irish SMEs.

So, while the Irish Government, as well as governments around the world, continue to formulate economic plans to tackle a range of era-defining issues, SMEs remain confidently poised and ready to take on the challenges facing them. The fact that so many are positive about their own prospects in the face of these challenges is testament to the sheer resilience of SME owners at home and across the world.

Yes, there is no one-size-fits-all solution to navigating the uncertain outlook ahead, but by ensuring they have access to a range of financing options that provide sustainable working capital and cashflow, they will be able to overcome any challenges and take advantage of any opportunities that arise over the remainder of 2023 and into 2024.

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Mark O'Rourke headshot
Mark O’Rourke

Managing Director, Bibby Financial Services