SME finances, the pandemic, and the design of enterprise support policies

We update estimates of aggregate revenue shortfalls due to COVID-19 in the Irish Small and Medium Enterprise (SME) sector for the full year 2020. Acknowledging heightened uncertainty, we estimate shortfalls of between €10.3bn and €11.7bn, based on reported reductions in firms’ costs (including wage support take-up) and revenues since March, and macroeconomic projections. In aggregate these shortfalls will be met by a combination of utilisation of pre-existing SME cash reserves, draw-downs of existing credit commitments, new borrowing, government non-wage grants and reliefs, guaranteed loans and loss-sharing where payments have been missed. In cases where these options are insufficient, shortfalls may also lead to the closure of firms. We review recent debates on the relative merits of debt, grants and equity-like support mechanisms, and conclude with results from a model of SME financial distress. The model assesses SMEs’ capacity to meet operating losses with cash or to service interest on bank debt, analysing the role of policy supports in mitigating these risks. The current policy support package, including elements related to both wage and non-wage costs, lowers the rate of financial distress by one-sixth. Encouragingly from a financial stability standpoint, the effect of current policy is larger when focussing on debt balances, reducing the financial distress rate by two-fifths. These results point to the importance of non-financial support policies, including those aimed at restructuring of liabilities of distressed enterprises, in the current environment.