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The Role of Small Business in Economic Recovery

Tue, 26 Oct 2010

Why the Irish government needs to listen to small businesses

The Irish government’s approach to remedying the financial and economic crisis has unjustly favoured the banking sector, which is the problem in the first place.

Meanwhile, it sidelined small and medium-sized businesses (SMEs), which have the power to return the economy to growth. In its effort to stabilise the economy before all else, the government has been too lenient towards the under-regulated banking sector, using state funds to keep banks afloat. Not so for small and medium sized businesses, whose needs are not adequately addressed.

It is essential that the role that SMEs play in the economy is not understated. There are about 20 million SMEs in Europe, representing over 99% of businesses and providing around 65 million jobs. According to the European Commission “they provide two out of three of the private sector jobs and contribute to more than half of the total value-added created by businesses in the EU”.

In Ireland, the percentage of small businesses is twice as high as the EU average. Action on three key areas by the Irish government would radically change the business environment for SMEs: access to loans; late repayment legislation; and a revision of the harsh bankruptcy legislation.

In the current economic climate, newly cautious bank managers are suddenly thinking twice before agreeing to loans. However, they’ve gone too far in that direction and small businesses are finding it increasingly difficult to get the credit they need to keep their businesses afloat. Government intervention is now needed to push these institutions to service viable SMEs.

Ireland is one of the few nations in the European Union that does not have some form of loan guarantee scheme. The government has stated that it is close to introducing a government-backed loan guarantee scheme for viable small businesses. SMEs are impatient as it seems that the government might be backtracking on the proposal somewhat, as a recent speech by Minister for Enterprise, Trade and Innovation, Batt O’Keeffe indicated that they may be re-considering the plan.

With an overwhelming 83% of companies reporting to the Irish Small and Medium Enterprises Association (ISME) that they are finding it difficult to access credit from banks, it is time that the government stepped in to ensure that these businesses can secure loans. The solution proposed by ISME is the creation of a specific business lending bank. Chief Executive of ISME, Mark Fielding, suggests that such a bank “would provide more effective competition to the two and a half major banks, which are more likely to “cherry pick” top business clients and dump the marginal ones, during a recession”.

Late payments are another major problem for SMEs, as lack of credit stalls growth and innovation and results in missed business opportunities. ISME says that big business and state agencies are “deliberately delaying payments”, with small businesses waiting an average of 73 days for payment. The Association proposes that a 30 day mandatory credit period is introduced by the government through legislation.

The third key measure that would benefit SMEs is an amendment to Ireland’s bankruptcy legislation. At present, bankruptcy can last 12 years in Irish law. According to a 2009 OECD report there has been an increase in reported defaults, insolvencies and bankruptcies among SMEs. Reducing the bankruptcy period would enable experienced entrepreneurs to try again.

As the European Commission observes, “SMEs are the true back-bone of the European economy”. Their contribution should be valued and reflected in relevant legislation.

 

See also: Small Businesses in Times of Economic Crisis

by Leah Leiva

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