Recession
Investment in SMEs Critical for Future Growth
By AJ Noonan, SFA
Aug 19, 2014 - 9:38:47 AM

The Small Firms Association Chairman, AJ Noonan, stated that the key to Ireland’s future success is enhancing equity finance and investment in small firms to encourage future growth.  

“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 Noonan.

Noonan highlighted the fact that equity finance is not widely used by Irish small firms.  The European Central Bank’s latest SAFE survey shows only 8% 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 Noonan.  The SFA would 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 Noonan.

Noonan 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.

The SFA have welcomed the announcement of the CGT Entrepreneur’s Relief in Budget 2014, however, Noonan said “in practice the scheme will not work in its current format as the relief is given after the sale of a second successful business.  In reality this means that it will take a decade before the entrepreneur will see any return and the likelihood of having two successful start-ups in a row is questionable.”  

The SFA propose the introduction of a specific CGT for Entrepreneur’s relief, equivalent to the UK scheme of 10% CGT if you sell or close all or part of a business.  In order to further support investment in the economy, the SFA is calling for a 20% rate of CGT across the board.  “History has shown that a lower rate substantially boosts the overall tax take, so the Exchequer will benefit by such a move”, added Noonan.

“For Irish SMEs, supply of finance is second only to finding more customers as the most pressing issue being faced.  Therefore it is essential that the government works to deliver a greater diversity of funding and investment options for SMEs,” concluded Noonan.

AJ Noonan,
SFA Chairman,
Small Firms Association,
84/86 Lower Baggot Street,
Dublin 2.
T: 01 605 1500
E: info@sfa.ie