Approval rates for SME credit applications improved in the six months to March 2016, while business credit demand in general has decreased significantly, according to a new department of finance-commissioned survey.

The SME Credit Demand Survey was conducted by Red C and amassed responses from 1,500 SMEs. Among the key findings, 85% of SMEs reported a stable/increased trading performance, similar to feedback from the previous six months.

Some 26% of SMEs requested credit between October 2015 and March 2016, of which 89% were approved or partially approved – an increase of 4% on the last survey.

Of those who did not request credit, 84% of SMEs stated that they did not seek its because they did not need it. That finding represented a 5% improvement on the previous survey.

The business outlook for the next six months was less positive, with 51% expecting the business climate in Ireland to improve, compared with 58% in the previous wave. Concerns about key export markets, including the possibility of a Brexit, were cited as likely causes for the decline.

In Association with

Other findings showed an improvement in average claimed turnaround time for bank finance applications, from 19 working days in the previous research wave to 16 working days now. Some 72% of all applications are now processed within the 15 working days target set by the current conduct for business lending – up from 65% in September 2015.

Poor Communication

While the majority of reasons given for declined credit are related to the applicant, e.g. inadequate repayment capacity or account performance, rather than banks, Red C found that more than a quarter (27%) of those SMEs that were rejected for bank finance claimed they did not receive a reason for the decline from the bank.

Of those who received a reason, 80% disagreed with the reason given for the decline. Furthermore, only 30% of declined applicants claimed they were informed of the right to an internal review, while just 26% of declined pillar bank applicants claimed they were informed of the right to review by the Credit Review Office.

Judging by the latest survey, while the main barrier for applying for bank finance appears to be lack of demand for credit by SMEs, many SMEs continue to believe that banks are not lending or only lending to a small number of SMEs – in direct contrast to the actual approval rates.

Commenting on the survey today, finance minister Michael Noonan said: “I am heartened to see the strong and growing awareness of supports the government has put in place to assist Ireland’s SMEs who are a key engine for employment generation.”

CREDIT DEMAND SUMMARY

The following is the summary of results from the credit demand survey covering the period October 2015 to March 2016, and the trends compared to the nine previous waves reported in September 2015, March 2015, September 2014, March 2014, September 2013, March 2013, September 2012, March 2012 and September 2011.

1. While trading conditions remain broadly favourable, we see increased future concerns among SMEs

45% of SMEs report increased turnover in the past 6 months, with 40% reporting stable turnover. Whilst this is down slightly from 47% reporting increased turnover in the previous research wave, there has been a slight increase in those reporting a stable turnover. We also see a decline in business outlook for the next 6 months with 51% expecting the business climate in Ireland to improve compared to 58% in the previous wave. Concerns about key export markets, including the possibility of a Brexit, could be the cause for this decline.

2. Credit demand among SMEs sees a significant decline

26% of SMEs have requested bank finances in the period October 2015 to March 2016. This is down from 30% in the previous 6 month period. When adjusting for seasonality, we see a decline in credit demand from 27% to 24%. The decline in demand is driven by Medium-sized companies rather than Micro and Small-sized companies where we see more stable credit demand. We also see a significant decrease in expectations to seek bank finance in the next 6 month.

3. Improved trading conditions, concerns about the future business climate, and a more cautious SME mindset all contribute to the decline in credit demand

It is evident that Medium-sized companies especially have seen significantly improved trading conditions over the past 2 years. As a result of this, many of these companies are now in a position to use internal funds to finance working capital and growth opportunities as opposed to requesting bank finance.

In addition to this, we continue to see a more cautious investment mindset among SMEs post-recession where the focus remains on strengthening the balance sheets, while pursuing smaller growth opportunities. Finally, uncertainty in relation to the World Economy impacts the SMEs’ investment level and thereby credit requirements.

4. Significantly more bank finance applications are approved

The decline rates for bank finance have decreased from 12% in the previous period to 10% for the period October 2015-March 2016. 79% of bank finance applications were approved in full for this period with an additional 1% being partially approved. The approval rates have thereby increased from 73% to 80%. 10% of all applications are still pending at the time of the survey. When these are excluded, the full/partial approval rate is 89% - an increase of 4% on the previous wave.

5. Quicker turnaround time for bank finance applications

We see a notable improvement in average claimed turnaround time from 19 working days in the previous research wave to just 16 working days now. 72% if all applications are now processed within the 15 working days target set by the current conduct for business lending – this is up from 65% in September 2015.

6. Less restrictive lending environment

It is furthermore evident that the banks require less in terms of collateral and conditions/criteria attached to loan than previously – thereby opening up for broader lending. Only 33% of the bank finance applications in the past 6 months required collateral compared to 40% in the previous survey period. 57% of approved applications had conditions/criteria attached to them, compared to 67% in the previous period.

7. Credit declines are increasingly applicant driven rather than bank driven

The majority of reasons given for declined credit are related to the applicant, e.g. inadequate repayment capacity or account performance, rather than bank controlled, e.g. change in lending policy. This again suggests a less restrictive lending environment where banks are willing to lend to SMEs with viable business cases.

8. But there is room for improvements in how banks communicate credit declines and the rights of declined applicants

More than a quarter (27%) of those SMEs that were rejected for bank finance claim that they did not receive a reason for the decline from the bank. Of those who received a reason, 80% disagree with the reason given for the decline. Furthermore, only 30% of declined applicants claim they were informed of the right to an internal review while just 26% of declined pillar bank applicants claim they were informed of the right to review by the Credit Review Office.

9. SMEs still believe banks are not lending to the SME sector

While the main barrier for applying for bank finance appears to be lack of demand for credit by SMEs, many SMEs continue to believe that banks are not lending or only lending to a small number of SMEs – in direct contrast to the actual approval rates. It is important to note however, that there has been a slight increase in the number of respondents who believe banks are lending to a large number of SMEs. More work is required to highlight this point.Communications in this regard may need to be clearer.