SMEs with property debt are twice as likely to default

 

Irish SMEs owed about €21bn to banks at the end of last year, with about a quarter of that in arrears.
Irish SMEs owed about €21bn to banks at the end of last year, with about a quarter of that in arrears.

About a fifth of small and medium firms (SMEs) have property debt that isn’t related to their main businesses, Central Bank research shows.

And SMEs with property loans are twice as likely to default, the study states.

Irish SMEs owed about €21bn to banks at the end of last year, with about a quarter of that in arrears.

A Central Bank letter on SME property exposure concluded that 10pc of firms with bank debt also have exposure to property investment at the same bank.

That figure rises to 16pc when including the buy-to-let mortgage book.

“Default rates are shown to be substantially higher for SMEs with property exposures,” the economic note said.

“Although the analysis presented here cannot draw inference regarding a casual relationship between SME default and property exposure the descriptive evidence shows that property exposures are indeed correlated with higher SME default rates, which are in some cases double the default rate among SMEs without property linkages.”

The data highlights the extent of the debt problem facing home-grown businesses in Ireland, with the SME sector making up the vast bulk of businesses in the country.

It’s estimated that about 828,000 people work in the SME sector in Ireland.

A separate report released by the Central Bank in June found that loans to small business across AIB, Bank of Ireland, Permanent TSB and EBS totalled €21bn in December, with an average loan size of €71,101.

The default rate on the debt was 26.05pc, with the default rate on the balance hitting 41.38pc.

And the bigger the loan, the more likely it is to be in arrears, with the highest default rates recorded in construction and hotels. Researchers at the Central Bank also found that the outstanding balance of lending to SMEs has been steadily falling since 2011.

Gross new lending to these sectors has remained between €450m and €750m per quarter since 2011, with no discernible upward trend.

Meanwhile, a separate study released earlier this week by cross border development body InterTradeIreland revealed that the number of SMEs in growth mode fell in the second quarter of the year to fewer than a third despite the economic recovery.

And more than 80pc of firms questioned said they were not exporting.

Its Business Monitor survey for the second quarter found that the number of companies that were growing fell to 
29pc between April and June compared with 37pc in the first three months of the year.