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Firms increasingly turn to trade credit

Thursday, May 15 15:01:23

An academic research paper today has found that firms starved of credit from banks are increasingly turning to trade credit to keep their businesses going.

The research findings from Conor M. O'Toole of the ESRI and Eddie Casey of the Irish Fiscal Advisory Council found that that credit-rationed firms are more likely to apply for and use trade credit and that this likelihood increases with firm size and age.

They also find that constrained firms are more likely to use informal lending or loans from other companies, but they find no evidence that bank-constrained SMEs apply for, or use, market finance.

Smaller, self-rationing borrowers are seen to be more likely to apply for grant finance.

Finally, the two economists find that firms denied credit for working capital tend to turn to trade credit, while informal and inter-company lending tends to act as a substitute for bank investment loans.

"These results have a number of implications for policy. As trade credit appears to be a primary substitute for firms rejected for bank lending, this may highlight a lack of other viable alternatives. This is also evidenced by the findings that firms tend not to turn to formal market debt or equity funding in such circumstances. Broadening the mix of financing availed of by European SMEs should therefore be an important policy objective at both EU and member state levels," their abstract said.

"Similarly, as we find little evidence of any uptake among constrained firms of state financing supports, this suggests that such policy measures concerning access to finance may be poorly targeted. Alternative interventions may need to be explored in order to better assist constrained firms that present viable investment opportunities."

Ronan Horgan, Managing Director of Bibby Financial Services Ireland (BFSI), Ireland’s leading invoice finance provider commenting on today’s report noted:

"I welcome today’s report for highlighting the difficulties companies now face when it comes to accessing credit. The results are not entirely surprising and they reflect our own experience on the ground in Ireland. The credit squeeze amongst our main street banks is leading business owners increasingly to turn to companies such as Bibby Financial Services who offer alternative sources of finance, such as invoice or trade finance. In January of this year, we announced that we had E60 million in funding for Irish SMEs through invoice finance which provides vital and instant working capital to SMEs. We also support exporting businesses through our export finance products. Since then we have experienced a positive response from Irish companies who are accepting that they must consider alternative finance options. We would strongly encourage all Irish companies to ‘think outside the bank’ and to explore the real funding alternatives which now exist in the Irish market".