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Firms need diversity of funding sources

Monday, August 11 10:18:34

Smaller Irish firm can no longer rely on banking finance and need a greater diversity of sources of essential funds for growth, according to Small Firms Association Chairman, AJ Noonan today.

He said that Irish small firms rely heavily on banks as a source of external finance, which makes them vulnerable to changes in the banking sector.

"As banks comply with more regulations, lending to SMEs will remain restrictive compared to the pre-crisis period. This is a problem and therefore, a greater diversity of funding options are necessary to ensure a constant flow of finance," said Mr Noonan.

He highlighted the fact that equity finance is not widely used by Irish small firms. The European Central Bank's latest SAFE survey shows only 8pc of the SMEs used equity finance as a source of funding.

"Currently in Ireland the demand for equity finance is low as there is no culture or tradition of using equity finance. Also small firms fear that they will lose control over their business and among small firms there may be a lack of awareness and understanding about this type of financing," said Mr Noonan.

The SFA propose that the new Local Enterprise Office (LEO) system should be used to inform SMEs and raise awareness of equity financing.

Venture Capital, Crowd Funding and Mezzanine Finance offer alternative forms of finance as SMEs business growth impacts on a firm's propensity to seek alternative sources of funding. "Rapidly growing SMEs are likely to access a greater diversity of funding sources than slower growing or stagnant firms, because they are able to offer higher returns for the invested capital," said Mr Noonan.

He outlined that credit flow to business can be improved by enhancing tax-based investment schemes, state-backed capital funds and EIB support.

An enhanced Employment and Investment Incentive Scheme (EIIS) is essential to allow business balance sheets to recover. "Currently this scheme is not working to its full potential and we have recommended some changes which include, the return to 5 years from 3 years investment term, so that the businesses have the necessary time to grow sufficiently to be capable of repaying the investors and return the scheme to its original name BES as this is more recognisable," said Noonan.

For more visit: www.businessworld.ie