Coronavirus: cash squeeze in Ireland’s SMEs threatens economy

Without money coming in the door, many small and medium enterprises (SMEs) in particular are unable to pay their bills – their rent, their suppliers, their bank repayments and so on.

Some can be deferred – but many cannot. And a serious cash squeeze is now in place in the SME sector and threatens the future of many companies. The Government moved quickly to underwrite wage costs and protect incomes. But unless credit supports are significantly increased, many may not reopen when restrictions are eased and others will do so weighed down by debts. But this is a potentially costly and risky issue for policymakers – but there is a potentially big price in not acting as well. This is a real issue for the Government – or quite possibly the next one.

The problem

The Government hoped to be able to turn the economy off when the necessary health restrictions were imposed and then turn it back on again. But as the period of closure extends, this gets more and more difficult. The income and wage supports were a key step to doing this, supporting people laid off and helping companies to retain a link with staff.

But typically SMEs face other fixed costs – such as rent, loan repayments and insurance – which could be 20 per cent of turnover and they must also pay suppliers.Without cash coming in the door, or with reduced amounts, many bills are now not being paid. This liquidity problem, if its persists, can quickly threaten the solvency of the company.

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Some are more fortunate than others – for example some landlords are working with companies, as are suppliers in some sectors. The Revenue Commissioners are accepting some delays in tax payments. But the knock-on impact is starting to hit – retailers not paying wholesalers, who then can’t pay suppliers and so on. And the longer it goes on, the less likely companies will be able to muddle through.

"This recession is unlike any we have seen before," according to IBEC economist Gerard Brady. " There has been no time to adjust and this has put incredible pressure on cash flow in the economy. For many businesses orders which were fulfilled in the opening quarter of the year have not been paid for, expensive stock is left sitting on the shelves, and payment timelines are stretched. As a result, the need for liquidity has greatly increased."

Specific sectors have their own problems. Ian Talbot, chief executive of Chambers Ireland, the umbrella body for chambers of commerce, points to clothing retailers who have money owing on spring and summer stock which will never sell and could thus struggle to reopen. In service sectors , meanwhile, companies face huge uncertainty on the pipeline of work ahead. " Cash just isn't going around."

According to ISME, the small business lobby group, the average SME has a non-payroll creditor’s ledger of €78,000, which it estimates to be worth €11 billion across Ireland’s 140,000 SMEs. It warns that this threatens to “cause thousands of potentially liable SMEs to go under in the next few month.”

What has happened so far

The Government has put in place some liquidity supports, increasing the amounts available in a range of special loan funds, notably two available from the Strategic Banking Corporation of Ireland (SBCI), with loans also available from MicroFinance Ireland some supports for companies going online including grants and a special voucher scheme. In total the Government says €1 billion is on the table in what is the repurposing of schemes which had been put in place for Brexit.

This has been welcomed by businesses – and many of the larger companies can access these funds and other supports at a European level. However business lobby groups say that this is not enough and that the loans schemes designed for Brexit, typically with interest rates of around 4.5 per cent, are not affordable for many SMEs, even with delayed repayment terms. Also, many of the smallest firms worst affected – for example retailers, pubs, small service firms in areas like plant hire and building supplies and smaller tourism businesses – simply do not have the links with state agencies like Enterprise Ireland which larger exporting firms would typically have. These are firms used to getting on with it for themselves which have received little by way of State support over the years – but now they need it.

Government ministers, including business minister Heather Humphreys, have said that more may need to be done. But given the scale of the commitment needed, it is not clear that the outgoing administration is in a position to bring this forward and that it may require a new government, which may still be a way off.

What is happening elsewhere

On March 13th the European Commission clarified that State Aid rules which normally limit supports from governments to businesses could be interpreted flexibly because of the crisis. In the jargon they put in place a "temporary framework."

Many other countries have come forward with very significant schemes to support liquidity in businesses. Denmark, an economy of a similar size to Ireland, has got EU approval for a €5.4 billion scheme which applies to companies which have suffered a 40 per cent or greater fall in revenue. It is broadly designed to cover a significant portion of their fixed costs and thus help them to survive and be in a position to restart.

According to Gerard Brady of IBEC , “for small firms, the best examples of policy action in other countries have simply recognised that many of these firms are good taxpayers in normal times and are now in a precarious position. As a response, they have decided to compensate firms by paying some of their fixed costs.”

In addition to the Danish scheme, “the German Government has promised to give €15,000 to small firms over three months, in the UK the number is €25,000.”

The options here

The Government has no shortage of advice on what it should do at a general or sectoral level. IBEC has called for a suite of measures, incuding a €2 billion zero interest loan fund and a major programme of State guarantees for company debts, as well as specific help to exporters and cash help for the smallest firms. In total it believes the exposure of the exchequer would be a maximum of €5.9 billion.

Other business lobby groups also call for zero interest loans and other measures to be introduced urgently. ISME says a special chapter 11 scheme will be needed to allow the SME sector to restruture. Ian Talbot of Chambers Ireland says legislation changes may be needed so that when companies restart they are not at risk of reckless trading. Retailers are calling for an extension of rate relief and some state intervention between landlords and tenants to mediate on rents.

The issues

This is not an easy one for policymakers, Government officials and the Central Bank are believed to be looking at options, but it is not clear what may happen. The significant financial exposure, in addition to that already committed to for the wage and income supports, will be a key factor. A key issue will also be when firms are expected to reopen, and what conditions might then be like, both factors which are hard to predict in many sectors.

Traditionally State financial support has gone to exporting companies, as these are seen to add value to the economy and bring wider benefits. Domestic business has generally been left to get on with it, as there are generally seen to be weaker reasons to provide it with financial support. If one retailer closes, for example, another may well take its place.

The case for assisting now relates to the risk of widespread economic damage and the impossibility for many of opening up again if cash has run dry a few months earlier. State liquidity support can thus ensure that more firms reopen and that those who do reopen are in a reasonable financial position. In turn these companies will reemploy people and start paying tax.

Policymakers will be fearful of the financial exposure at a time when the exchequer finances are already under huge pressure. They will also want to avoid helping firms who do not need assitance, or assisting those who are going to close whatever happens. Fraud will also be a concern. But despite all this, the massive cash squeeze looks set to be the next front on which policy will have to open up to try to limit the economic cost.