Firms fearful of taking on debt ‘limit their ability to grow and scale’, bank lending watchdog warns

The latest report from Credit Review, the state body which checks lending decisions made by Irish banks to businesses, found that just 17pc of Irish SMEs (small and medium enterprises) expect to borrow in the next six months.

Citing a survey from the European Investment Bank, Credit Review said Irish firms are much more likely to use internal funding rather than using bank finance.

“The vast majority of SMEs cite a preference to use internal funding rather than borrowing for investment,” it said.

“Irish firms depend far more heavily on self-financing than their European counterparts.

“This can lead to inefficient use of their resources, tying up working capital and can prevent firms building good credit records.”

Neil McDonnell, chief executive of small business group Isme, agreed not taking on debt can hinder growth.

“There’s no question about it. If you’re not using external sources of working capital, then you’re totally constrained by your existing sales,” he said.

“Bootstrapping is great at the startup phase when you’re living at home and living on beans on toast, but when you want to scale you need working capital, and you need it from somewhere other than the sales ledger.”

Credit Review found an issue is that many Irish lenders have moved towards automated credit decision-making.

The organisation said: “[This] can improve responsiveness in terms of timelines for the majority of customers, and can work well for those cases that succeed first time.

“However, most of the appeals Credit Review overturn simply require more analysis and probing than the current automated processes allow for.”

McDonnell said this automated approach discourages many SMEs from borrowing.

“If you do have a bank on a main street, they’re like that person out of Little Britain, it’s just ‘Computer says no’.

“SMEs avoid them as they’re not dealing with a person who’s a decision-maker. You could devote days to putting together a loan application and then it could just be rejected.”