Small firms shouldn’t fear rejection

Small business owners in Ireland remain cautious when it comes to borrowing. But why? 

Prof Brian Lucey

A new study by the Professor of Finance at Trinity College Dublin, Brian Lucey (left), suggests many small business owners in Ireland won’t apply for bank loans because they fear being rejected.

6,287 small firms were interviewed, across nine countries in the EU, over the period 2009 to 2012.

44% of Irish SME owners surveyed (during this time) said they would not apply for credit because they feared rejection.

“Small firm owners are probably more optimistic now, in 2015,” says Prof. Lucey. “But even if that number is halved today – if over 20% of small firms in Ireland fear rejection by a bank – it is still too high.”

Relationship building 

Prof. Lucey says the report backs up anecdotal evidence that business owners feel they can’t build a personal relationship with their bank.

“Credit scoring is necessary, but it shouldn’t be the end-all. Business owners want to deal with lenders they trust and banks need to rethink how they handle relationship management.”

The cost of borrowing

While business owners may be cautious about borrowing money, the banks are actively encouraging business owners to seek finance when needed.

“The reality is, the cost of borrowing for Irish firms remains too high,” says Lucey. “However, bank finance is still much cheaper than venture capital (VC) funding and is often the best source of finance for small businesses.”

Confidence and encouragement

The study suggests the last economic crash had a significant impact on business confidence.

“There may be a certain amount of ‘psychic scarring’ in the economy about borrowing and lending. However, there’s a lot of money out there now that can be borrowed, and there are a lot of small businesses that need money to grow. The system – the banks, regulators, and small firms – needs to re-educate itself. The past is the past.

“If a small business is stable, it should receive the support it requires to grow. This is where the ‘human touch’ on the part of the banks can play its role. If the lender knows the business on a personal level, the business has a better chance of getting credit. This, in turn, benefits the economy. If a business grows, it hires more people. More people in work means more wages in the economy and on it goes.”

The Discouraged Borrowers: Evidence from Eurozone SMEs study also reveals that younger, smaller companies are the most reluctant and the most likely to be discouraged.

READ: How to apply for a business loan. Three ways to finance your business.

Images from Shutterstock and Prof. Brian Lucey. ⊕