Microfinance Ireland played an important role in sustaining hundreds of micro enterprises during the 2020 trading lockdown

Are the banks lending to small business? Yes, they are, but obviously the past two years have been tough for their borrowers, so lending has declined.

Central Bank data shows that gross new lending to SMEs recovered strongly in 2018 and 2019 before tumbling back when the Covid pandemic arrived. There was more activity in 2021, but the outcome was at the lending level five years previously.

The latest information from the Central Bank is that gross new lending to SMEs was €880m during Q3 2021, a 1.3% decrease on the same quarter in 2020. Trends in new lending differ across economics sectors, with Q3 new loans to primary industries and real estate activity down 14% and 36% respectively, while lending to wholesalers and retailers increased 15% year-on-year.

Quarterly net lending to ‘core’ SMEs (excluding property and financial enterprises) remained positive last autumn, at €660m. The average interest rate on new SME loan drawdowns was 3.8%, down marginally on the previous year, though higher than average rates are charged to Agri borrowers and the business service sectors.

For micro-enterprises, there is an alternative to the banks in the form of Microfinance Ireland (MFI).

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Chief executive Des McCarthy says the lender processed 1,150 loan applications in 2021 and approvals resulted in €8.8 m worth of loans. The state lender was established ten years ago to foster employment growth, so job creation is an important metric. By McCarthy’s tally, MFI’s lending last year supported 865 jobs.

MFI clients span the butcher, baker, and candlestick maker. "We also lend to hairdressers and nail bars, coffee shops, food trucks and that sort of thing, plus some small manufacturing businesses," McCarthy explains. "We are restricted to funding micro enterprises employing fewer than 10 people and with a maximum turnover of €2m. The maximum loan is €25,000."

McCarthy was formerly chief financial officer at KBC Bank Ireland, and he is non-executive director of Cluid Housing, a not-for-profit that provide rented accommodation for people on low incomes. "I like lending and MFI is a pure lending operation, which suits me down to the ground," he remarks.

Microfinance Ireland’s borrowers are often declined loans by their bank. "We have a larger appetite for risk than most other lenders. Our mission is to help high-risk businesses that find it challenging to source finance from traditional sources. There are not many funders willing to take our level of risk with start-ups."

Microfinance Ireland borrowers were the type of micro enterprises worst affected by lockdown trading restrictions in 2020. The organisation responded by ramping up lending to assist stressed traders, and indeed MFI had to stop lending for a time until government injected new capital to fund a special Covid loan product.

MFI’s accounts disclose a total loan book of €30.1m in December 2020 compared with €9.4m the year before, Restructured loans amounted to €8.6m, and there was an accounting provision of €12.3m for bad or doubtful loans. McCarthy expects to see a lot of these loans being repaid as the economy re-opens for business.

In May 2021, the organisation’s directors noted in the accounts filing: "The scale of increased lending underwritten in 2020, and the ongoing challenge resulting from the Covid-19 emergency, will have very material impacts on the activities of the business.

"The loan book under management has increased three-fold and the economic environment remains extremely challenging for micro-enterprises. This will require ongoing intensive management of the loan portfolio for a sustained period."

In October 2021, MFI’s coffers were refreshed when it partnered with the Strategic Banking Corporation of Ireland (SBCI), which has committed up to €30m for Microfinance Ireland to lend to borrowers. The finance comes from the state’s Microenterprise Loan Fund, and loans will have a term of up to five years, with amounts up to €25,000.

"This funding will allow us to support an even greater number of start-ups and established micro enterprises," says McCarthy. "The rate offered on this SBCI funding will lead to a reduction in the rates we charge our borrowers, thereby making our loans more affordable for our customers and supporting more of them with their business plans."

Image: Des McCarthy of Microfinance Ireland (Provided)