In the current economic market I have more than once mentioned that the real road toward financial stability for Ireland is for SME (Small to Medium Enterprises) to hire. As a general rule there should be around 1 employee per 1 million dollars U.S. in revenue (this is of course an estimate and not a hard/ fast rule). SMEs make up a majority of the business machine in Ireland, and as a result they have to expand and have to hire. Where should they get the confidence in the current environment, where do they turn to in a crunch for capital or the ever popular overdraft to float them through capital fluctuation? A recent study has revealed that in a survey by the CBI and ACCA (Association of Chartered Certified Accountants) 380 UK firms showed that they are increasingly turning away from traditional forms of bank financing and are looking to other sources for their needs.

So where are businesses turning instead of the banking industry, the most common answer is supplier financing from the supply base. The businesses are negotiating alternative terms with their creditors for trade credit in exchange for their goods and services. The only issue with however is that the creditor has now slowed down their accounts receivable cycle and impacted their cash flow. This brings me back to the idea that the strongest businesses with the strongest cash position will come out incrementally stronger following the economic meltdown in Ireland.

To complicate this negotiating terms and negatively impacting your creditor’s accounts receivable cycle carries with it a higher cost of capital. This increased cost of capital must then be passed on to someone to compensate and protect the gross margin of the companies. This cycle is how inflation begins to spiral out of control and prices rise at rates higher than the ideal rate. In short the alternative finance arrangements caused by the reluctance of the SMEs to approach banks leads only to higher prices for the consumer, who coincidentally is the employee of the firm that reached up and raised prices to protect it/s margin . It seems counter intuitive and according the study companies that have operations in Great Britain are faring better with higher success rates on overdraft acceptance when compared to those exclusively doing business in Northern Ireland.

In order to correct the imbalance and avoid another input for an inflationary period the banks need to court these SMEs and return terms that support hiring and job creation in return for solid financing. The financial issue is only the manifestation of the underlying problems with the business market; the real root is a lack of confidence and stability in the business environment. The lack of SMEs seeking financing is proof that the issue is deeper that just the access to capital, but rather access to their government.