03 Apr 2014

New debt-forgiveness scheme could save SMEs battered by the downturn

Filed under: Business News

A debt-forgiveness scheme for small and medium enterprises (SMEs) battered by the crash is among proposals to be examined by a high- level working group being set up by the Government, the Irish Independent has learned.

Banks will be asked to cancel some company debts in exchange for shares in even small firms if the debt-for- equity proposal is taken up, according to sources close to the process.

The radical plan is seen as one possible way to salvage the balance sheets of small businesses battered by the debt bubble and subsequent seven-year crash.

The idea is one of a number on the agenda for the new working group in the process of being established under the umbrella of the State-led Consultative Committee on SME Funding.

Examining ways to encourage investment such as potentially revitalising the old tax break-based Business Expansion Scheme (BES) and the possibility of utilising funds from the National Pension Reserve Fund (NPRF) will also be on the table.

The lack of equity investment for SMEs is emerging as a significant blockage in the economy, particularly as things start to pick up and the demand for capital increases.

Up to now, the big emphasis has been on the supply of credit.

As the volume of lending available has increased both from the banks and from new purpose-built lending funds, the focus is shifting to the issues that are hampering companies’ capacity to borrow.

A good example is the house building trade. Banks and NAMA say they have credit available and there is evidence in Dublin in particular of demand for new homes.

But one reason more houses are not being built is because builders are unable to come up with the share of finance they need to produce to allow banks to lend prudently.

HURTING

Similar issues are hurting other parts of the economy because historic losses have diminished balance sheets even for companies that are now trading well.

It’s a real concern, not least because experience elsewhere is that more companies can end up going to the wall during an economic upturn – when cash is needed for new products – as in a downturn.

The problem is understood to be most acute at the smaller end of the economy – the more than 90pc of companies with 10 or fewer employees.

The Consultative Committee on SME Funding brings together representatives of agencies including the Department of Finance, Department of Jobs and Enterprise, Enterprise Ireland and the county enterprise boards as well as industry groups such as ISME and the Small Firms’ Associations and the banks.

At a meeting on March 24, it is understood a decision was taken to set up a new sub-group to try to examine the problems in relation to equity funding.

The make-up of the sub-group has yet to be determined but the plan is to put together a group of six committee members representing a cross-section of industry, banks and government agencies.

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