Even with business support measures, RTE reports that SMEs still have financial issues
There was a rare piece of positive business news in recent days amid the relentlessly gloomy financial and economic headlines of late.
New figures from Deloitte revealed that corporate insolvencies had fallen by almost a fifth in the first three months of this year. 159 companies were declared insolvent in the period, a drop of 18% on the same period last year.
That’s been a consistent and welcome trend as we move further away from the 2008 financial crisis.
The problem is that we now look to be moving headlong into a new crisis of perhaps even bigger proportions, with a potential upsurge in corporate distress, a point noted by Deloitte.
“It’s arguable that the current crisis has created the most significant challenge for otherwise viable Irish companies,” David Van Dessel, Partner in the Financial Advisory division at Deloitte said.
“It may be the case that as the year progresses, the Irish business community will experience an increase in the utilisation of examinership as a process to facilitate corporate restructurings in companies with a reasonable prospect of survival.”
The Government was quick to introduce a range of measures when the Covid-19 crisis hit and companies were forced to close their doors and lay off staff.
The income support schemes cushioned the blow for businesses that could at least defer staff costs for a number of months.
A series of business supports were also introduced including the extension of two existing loan schemes administered by the Strategic Banking Corporation of Ireland.
Revenue suspended the charging of interest on late payments for a number of months and local authorities agreed to defer rates payments for the most immediately impacted businesses. Banks also introduced payment breaks on credit facilities.
However, the bills are still mounting, with everything from rent, insurance and loans having to be serviced.
A serious cash squeeze has ensued and many companies are not adequately capitalised to survive a sustained period of inactivity, sectoral groups argue.
A recent survey of over 1,000 businesses carried out by Chambers Ireland revealed that 6 in 10 had already discussed an extension of payment terms with creditors, including landlords, banks and the Revenue Commissioners.
It’s not just overheads that are falling due. There are outstanding payments within the sector. The SME representative association, ISME, estimates that the average company owes €78,000 to other businesses.
“This suggests an inter-company debt of just under €11 billion throughout the economy,” Neil McDonnell, CEO of ISME explained.
“This debt is owed to thousands of small businesses for food, drink, stationery, cleaning, accountancy, distribution, materials and much more. If it is not repaid, the viability of the businesses to whom the debt is owed will be fundamentally undermined. The domestic SME sector isn’t highly profitable, which means many businesses will burn their remaining cash reserves quickly.”