Irish SMEs face persistent financing challenges despite economic recovery, new ESRI research finds

New research published by the Economic and Social Research Institute (ESRI) finds that nearly two decades after the global financial crisis, Irish small and medium-sized enterprises (SMEs) continue to face significant challenges in accessing finance, with high borrowing costs and limited banking competition suppressing demand for credit.

The study, Irish small firm financing: Where are we 20 years since the financial crisis? is funded by the Department of Enterprise, Tourism and Employment and provides a comprehensive analysis of SME financing trends in Ireland and across Europe using ECB survey data.

Key findings

The research highlights several structural issues in the Irish SME financing landscape:

• Lower demand for bank credit: Irish SMEs are significantly less likely to seek bank loans than their European counterparts, despite strong domestic economic growth.
• Heavy reliance on trade credit: Firms in Ireland depend more on trade credit than SMEs elsewhere in the euro area, which may limit investment in long-term growth.
• Higher borrowing costs: SME interest rates in Ireland remain above the euro area average, reflecting low competition - among other factors - in the banking sector.
• Declining rejection rates but hidden constraints: While formal loan rejection rates have fallen, high costs may be discouraging firms from applying for credit in the first place.

The study identifies a “triple pattern” in Ireland’s SME credit market: low demand for bank finance, high use of trade credit, and relatively low rejection rates. This combination suggests that cost—not just availability—remains a key barrier to finance.

Impact on SMEs and the wider economy

The findings raise concerns about investment and productivity. Limited access to affordable bank finance may constrain firms’ ability to invest in innovation, capital expansion, and long-term growth.

The analysis also shows that younger and micro firms face the greatest challenges, with higher rejection rates and greater reliance on alternative financing sources.

Policy implications

The paper concludes that Ireland’s SME financing policies – while expanded significantly since the financial crisis – may not fully address current market frictions.

Existing measures such as credit guarantees and State-backed lending schemes primarily target the availability of credit. However, the research suggests that policymakers should place greater emphasis on:

• Reducing the cost of borrowing
• Increasing competition in the banking sector
• Enhancing direct lending options
• Providing targeted supports for young and micro firms

The report also highlights the potential role of non-bank lenders and digital finance providers in expanding financing options, though these currently serve different market segments rather than directly competing with banks.

“Improving SME access to affordable finance will be critical to sustaining Ireland’s long-term economic growth and competitiveness,” said Dr Tara McIndoe-Calder, co-author of the report. “There is a need for continued policy innovation, including exploring new approaches such as direct State-supported lending and structural reforms to foster a more competitive credit market.”

Dr Dermot Coates, co-author of the report and Chief Economist at the Department of Enterprise, Tourism and Employment notes, “Ireland’s indigenous SME sector is a core component of our economy and is particularly important for the labour market. The pursuit of sustainable growth will require that we build-up the capacity of this sector but as the report makes clear, access to finance remains a barrier and there is an ongoing need to address both the cost and availability of finance”.