Recovery in SME sector gains momentum

The recovery in the SME sector is gaining momentum a review of 15 indicators impacting on the sector shows, but there is little improvement yet in earnings and disposable income.

Published by DKM/Banking & Payments Federation Ireland (BPFI), the SME Market Monitor for November, which gauges the health of the SME sector, shows that the performance of virtually every indicator has improved.

"It's quite positive, it shows that the recovery is gaining momentum," said Annette Hughes, director of DKM Consultants and author of the report.

“There is evidence that the good times are around the corner,” she said, but added that the sector is still “very fragile”.

Indeed the one indicator which has yet to show signs of improvement is earnings and disposable income.

“We need to see a real recovery in disposable income before we see a pick-up in SME activity,”she said, but added that “employers need to see sustained improvement in turnover and profits” before this happens.

The monitor also shows that construction is “bouncing back” on foot of the renewed focus on the sector and should see substantial gains arising from the social housing measures in Budget 2015, although a cautionary note was sounded with respect to the Central Bank’s proposed mortgage lending restrictions.

Overall, the survey shows that lending to SMEs was up strongly in the second quarter of the year (+55.7%), albeit from a low base, while outstanding SME debt continues to fall.

On the banking front, Maurice Crowley, director with BPFI, said there is scope for optimism.

“It’s the first time in a while that we’ve seen financing for investment purposes. Up until now it’s been largely working capital,” he said of demand for lending.

On the potential for new lenders to come into the market, Mr Crowley said that there were no new players on the horizon, but that as lending increasingly moves online, it could pave the way for new entrants.

The association is also currently working on potential solutions to the “equity gap” that is frustrating some SMEs from getting financing. With banks unlikely to give 100 per cent debt financing, SMEs are struggling to get the funds to cover the gap, but the BPFI said that credit guaranteee type funds that exist in countries across Europe could offer a soultion.

Another option is to introduce some kind of incentive for investors to put equity into a company, along the lines of the Allowance for Corporate Equity (ACE) scheme proposed in the UK.