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Irish Independent
Irish Independent
Jon Ihle

Small firms face a testing year ahead as growth slows to a trickle and borrowing costs rise further

Finance Ministers old and new Paschal Donohoe and Michael McGrath. Photo: Steve Humphreys

The past year was a period of considerable turbulence in the Irish small business sector.

Beginning with the Omicron lockdown and ending with the first fully open Christmas shopping season since 2022, SMEs travelled a bumpy road from January to December.

While the full reopening of the economy followed a sharp drop in Covid cases in the first two months of the year, commercial and economic conditions were anything but stable.

As tens of thousands of small firms prepared for life without vital State Covid support payments in the spring, Russia’s invasion of Ukraine in late February threw the long-awaited bounceback immediately into doubt.

A spike in energy prices fed into an already well-established inflation trend, making a mockery of optimistic financial projections for 2022 as owners tried to figure out how to deal with higher input costs and supply chain disruptions.

By July the European Central Bank under Christine Lagarde piled on the hurt with its first half-point interest rate increase, which began the fastest hiking cycle in its history. Borrowing rates have gone up 2.5 percentage points in the six months since, dramatically changing the cost of funds for any business with debt or looking to borrow.

Predictably, the growth outlook is now uncertain – both globally and domestically – as the same conditions are occurring everywhere in the world. At best, a mild recession is on the cards with a shallow growth profile for Ireland in 2023.

ECB president Christine Lagarde. Photo: Alex Kraus/Bloomberg

For the majority of SMEs whose market is the indigenous economy, the sustained recovery everyone hoped for never quite materialised.

On the bright side, neither did a wave of forecast bankruptcies. The SME sector has proved remarkably resilient, even without lavish Government subsidies.

But 2023 represents the true test as Ireland returns to something approaching normal for the first time in three years.

Here are four key themes to watch.


This is the dog that didn’t bark. Over 2020 and 2021, the number of small businesses in financial distress grew by 50pc, according to the ESRI. That was notwithstanding the extraordinary financial support from the State, which spent more than €10bn on company payrolls alone.

Yet in that time insolvencies actually fell, suggesting there is a backlog of firms on the brink and in need of either restructuring, new investment or liquidation.

An ESRI paper published in January suggested that allowing the natural cycle of “life and death” to take place would return the SME sector to its normal financial characteristics by the end of this year.

If there is indeed a lot of red ink out there, it has to fall on somebody’s balance sheet.


So far it hasn’t. According to a tally by Deloitte earlier this month, a little over 500 companies went into insolvency in 2022. While the figure represented a big increase over the 401 recorded in 2021, historically it is a small number.

Moreover, nearly three-quarters of insolvencies this year were creditors’ voluntary liquidations, meaning they were initiated by a company’s directors rather than unpaid creditors looking to recover pennies on the euro.


The Small Company Administrative Rescue Process (Scarp), introduced as a low-cost, quick alternative to High Court administration for small firms, was used by just 22 companies this year, representing 4pc of the overall number of insolvencies.

Scarp allows SMEs to continue to trade while negotiating the write-off of existing debt and restructuring with creditors. So far, eight companies have completed the process, while three have failed with the loss of 61 jobs. Ten remain active in the system.

The closure of some well-known hospitality businesses in recent months is perhaps a sign of worse to come

Still, there is a sense that insolvency remains a ticking timebomb. Insolvency practitioner Neil Hughes of Baker Tilly sounded the alarm during the summer of a wave of interest in Scarp once wage subsidies were withdrawn and Vat payments were due.

The closure of some well-known hospitality businesses in recent months is perhaps a sign of worse to come.


The post-crisis deleveraging continued for Irish businesses through Covid, as firms used the extraordinary State and Central Bank support to keep paying down debts.

But the credit cycle began to turn in late 2021 and, by the first quarter of this year, businesses were borrowing again, if only marginally.

First at the trough were big companies, which ramped up borrowing from December 2021 in anticipation of interest rate hikes to come.

But SMEs were not far behind. Net lending to small businesses turn slightly positive in the last quarter of 2021 and steadily grew throughout the year.


The amount of net lending to businesses in October was the highest since 2009 as firms continued their post-Covid borrowing trend.

Net lending to non-financial corporations was positive in October with drawdowns exceeding repayments by €2.6bn on an annual basis.

Ulster Bank is leaving Ireland. Photograph: Patrick Bolger/Bloomberg

That growth reflects a certain level of optimism about the future after a decade of caution. Invoice finance companies and other non-bank lenders have stepped up activity in the market as KBC and Ulster Bank prepare to exit.

Venture debt funds such as BGF, Claret Capital and Muzinich, all backed by the Ireland Strategic Investment Fund, have been raising fresh capital and closing funding deals with promising SMEs in 2022.


The bulk of new SME borrowing in 2022 is on terms of under a year, a trend stretching back to April when State Covid subsidies were being withdrawn.

About three quarters of the net increase in business borrowing has come from short-term credit, which indicates it is largely drawn from credit cards and overdraft debt.

The European Central Bank has also warned banks about credit stress coming into 2023 due to the rapid increase in interest rates. While the Irish banks are now expecting bumper profits in the new rate environment, bad debts are likely to increase in a downturn.

Indeed, trends on late payments compiled by the Irish Asset and Invoice Finance Association showed a slight increase in debtor days by mid-year, a possible sign the latent financial stress from the pandemic was beginning to appear.


About 75,000 businesses owe a combined €2.6bn in unpaid taxes from 2020 and 2021 after Revenue suspended collection – no questions asked – for companies that were negatively affected by the pandemic.

But those bills, at an average of more than €33,000 per firm, are coming due starting in January 2023.

Firms are being asked to either pay in full or sign up to a low-interest phased payment arrangement – including a lump sum of 25pc – in the new year.

Revenue could come knocking over significant Capital Gains Tax, farmers have been warned

For businesses already struggling with spiralling input prices and higher finance costs, it could be a tough ask, as firms are now likely to be encountering payment demands on trade credit, rental arrears, and current tax liabilities.


Nearly nine in 10 businesses that warehoused their tax debt owe less than €5,000 each on average. Sums like that are unlikely to break the bank except for the most distressed cases for whom a small tax overhang is likely the least of their worries.

But even at relatively low sums, warehoused debt represents a form of unsecured low interest loan from the State on terms unavailable in the commercial market.

No SME can secure credit at the 3pc reduced rate of interest offered by Revenue for firms that comply with the warehousing terms. Even the penal rates of up to 10pc for non-compliant firms aren’t terrible.


There is a substantial cohort of 7,500 firms with average debts to Revenue of nearly €300,000 each. These debtors account for the bulk of outstanding warehoused taxes of about €2.2bn.

The Department of Finance under Paschal Donohoe estimated in 2021 that about a quarter of warehoused tax would never be paid back, which would put the cost to the State at about €800m of the peak scheme amount of €3.2bn.

The Central Bank has suggested the State could take equity stakes in distressed companies that can’t meet their tax obligations. Alternatively, they advocated applying profit surtaxes in future years for companies that are unable to clear the debts.


The performance of the economy matters perhaps more than any of the above.

For the most part, the Irish economy hummed along nicely in 2022, notwithstanding the challenges posed by war in Ukraine and the transition out of Covid.

As usual, the multinational sector drove robust growth and record corporate tax receipts, fattening up the Exchequer such that the Government was able to run a modest surplus this year.

The windfall meant that Budget 2023 included significant subsidies for businesses struggling to cope with a sharp rise in energy costs.

Russia’s war in Ukraine added a level of uncertainty and threw a long-awaited Covid recovery into doubt. Photo: Narciso Contreras/Anadolu Agency via Getty Images

But the divergence between the international sector and the indigenous economy remains wide.

Modified domestic demand growth is estimated at under 1pc next year, with GDP somewhere above 3.5pc. High inflation, which peaked at 10pc, has reduced purchasing power and knocked both consumer and business confidence in the back half of the year.


Ireland remains one of the strongest economies in Europe and the public finances are in very good shape. Ratings agency S&P raised its outlook just a couple of months ago, citing strong revenue from corporation tax, income tax and Vat as well as prudent budget management.

While the world may enter recession, most forecasts show Ireland having a growth slowdown rather than shrinking.


A high-cost, low-growth economy doesn’t feel good for domestic SMEs and there is still the possibility of a harder than expected landing if the ECB doesn’t calibrate monetary policy for local conditions.

Hard-hit sectors such as hospitality and retail never fully got back on their feet after Covid and are likely to continue struggling under more challenging conditions.

Finally, with no end in sight to the war in Ukraine, persistent disruption to energy supply may become a structural feature, which won’t make life easier for business.

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