Many small businesses are in serious jeopardy unless the banks quickly make more finance available, writes Fiona Reddan

IRISH SMALL businesses are facing a crisis that threatens to wipe out thousands of jobs and close hundreds of companies.

While the economic downturn is creating its own problems, the major issue currently facing small and medium-sized businesses in Ireland is not a slowdown in business but rather a clampdown on bank financing.

The Government's guarantee has enabled Irish banks to raise funds, as evidenced by AIB's recent bond issue, but, according to small and medium-sized businesses, the benefits have not yet been passed on to them.

Jim Curran, head of research and information services with the Irish Small and Medium Enterprises' Association (Isme), says that companies are having their "air passages blocked off" as their "life-blood", or cashflow, is being restricted by banks withdrawing or clamping down on overdraft and lending facilities. He says the situation is now at crisis levels. If the banks do not start lending soon, the numbers going out of business will increase.

"For a successful business sector, we need a successful banking sector, and for a successful economy we need both working in tandem - but this isn't working," he maintains.

According to an internal Isme survey, 57 per cent of companies cannot get the finance they need to keep their businesses going - a figure which has trebled since last August.

Patricia Callan, director of the Small Firms' Association (SFA), says that unless the issue is recognised as having reached crisis point by the Government and "unless specific actions are taken in a matter of days, the small business sector will implode and unemployment levels will soar".

One of the ways the issue is hurting the small and medium-sized enterprise (SME) sector is with regard to late payments. According to Isme, the average payment period has expanded by about two weeks from 50 days to 65 days over the past few months. While companies would normally draw on bank facilities to cover any shortfalls arising, this option now is not open to them.

That means they in turn are delaying payment to their suppliers, creating a vicious circle. As a result, some companies are now having difficulties paying employees, which is leading to companies reducing staff numbers.

Shay Cahill runs Venture Network Ireland, a networking resource for companies in the SME sector. He says that banks withdrawing or restricting financing facilities is the "talk of the town" among his members, and is a very serious issue which is leading to redundancies and companies scaling back expansion plans.

The banking sector insists that it is still lending. "Notwithstanding the challenging economic and financial environment, good projects continue to be supported by the banks. They remain open for business for credit-worthy customers," says Felix O'Regan, spokesman with the Irish Banking Federation, citing a statistic which shows that the value of overdrafts to business at the end of September was almost 14 per cent higher than at the same time last year.

However, Curran says that many of the companies who have been complaining to Isme have been in business for over 20 years. "So even having a clean credit history doesn't help," he adds.

The issue is leading to a lot of bad feeling among businesses in the sector, which feel that the Government has let them down. "The Government and banks now need to step up to the plate," says Cahill, adding, "I think the banks have a big public relations exercise ahead of them."

"The Government needs to get off the fence and banks have to start lending. It's just not good enough to recapitalise the banks; we need to have a policy where they also start lending," agrees Curran.

One possible relief for the SME sector may come from the European Investment Bank (EIB), which last month established a €15 billion fund, as part of a €30 billion funding package up to 2011. Commercial banks across Europe can access the fund to lend on to SMEs in their country during 2008 and 2009. So far, only two countries have signed up to the scheme, says the EIB, but it adds that it is currently in discussions with a number of Irish banks and is "hopeful" that it will sign some agreements with the banks by the first quarter of next year.