CPD Seminar 11 th March h2013

Transcription

1 Securing Credit for SME s in 2013 Paul Kerr CPD Seminar 11 th March h2013

2 INTRODUCTION Lender with over 20 years experience worked with AIB, National Irish Bank and Bank of Scotland (Ireland) Senior Credit Reviewer withthegovernmentthe Credit Review Office over viewing declined business lending decisions in both AIB & Bank of Ireland External credit assessor (loan approver) for the government backed Microfinance Ireland approving loans of up to 25,000 to SME s Banking & debt consultant with First Choice Financial Services in for over 3 years

3 BANK FUNDING FOR SMALL BUSINESSES 1. Banks seek 30% own input, as a rule 2. The business plan is very important there is a really good business plan template which I believe represents best advice in terms of the information needed 3. Be prepared for forensic examination of borrower history, 12 months personal bank statements, loan statements and detailed personal income & expenditure are as important in a funding application 4. Projections need to be conservative. They need to be broken down into practical numbers can you really clean 1,000 carpets a week? 5. Guarantee s will always be sought, and are normally required

4 HOW BANKS ASSESS YOUR APPLICATION 1. Track Record 2. Ability 3. Purpose 4. Amount 5. Repayment Capacity 6. Security 7. Market

5 BANK FUNDING OBSERVATIONS OPEN Food production, Distribution & Agriculture. Sectors like nursing homes are sort of open for business but tend to fll fall apart based on loan to value rules. Minimali appetite for any type of property related lending. Attitude of banks towards all types of property lending is a factor in the continuing fall off in property prices. Many foreign owned banks exiting the SME market creating particular difficulty for SME that bank with them. Viable SME at risk where they are directly or indirectly supporting unviable property enterprises. Right sizing the capital structures is a key requirement to reflect the new trading environment.

6 BANKS ARE LENDING!

7 BENEFITS FOR A BUSINESS USING A 3 rd PARTY FUNDING Prevents dilution of message See sample video to illustrate!

8 BENEFITS FOR A BUSINESS USING A 3 rd PARTY FUNDING Standardised format / Professional The financial broker / agent will be dealing with banks & people whom we know and regularly send business to mutual trust They can complete multi applications at thesame time & get you the best funding package It s quick, convenient, to the point less stress involved!

9 SAMPLE BANK FUNDING APPLICATION Sample Funding Application

10 OPTION 1 CONVENTIONAL BANK FUNDING SME Job Creation Loan The SME Job Creation Loan supports small businesses by providing finance for new projects, processes or initiatives that will create jobs. Loansfrom 10, up to 250, per business may be requested. Terms You must be an existing AIB business customer Need to demonstrate that you are investing in a new project process or expansion initiative that result in the creation of at least one permanent full time job The AIB Job Creation Loan is priced competitively at 4.4% p.a. variable which is a discount of 3.85% off the Bank's standard "AA" Business Loan Variable Rate.

11 BANK FUNDING - AIB SME Job Creation Loan Continued Typical qualifying projects. Building acquisition/remodelling. Purchasing of second hand or used vehicles, plant, machinery or equipment for use by the customer's business. New business acquisition. Financing for overseas sales. Any project that has been approved for grant funding by a state agency e.g. Enterprise Ireland, County Enterprise Boards, Bord Bia, etc Non qualifying Projects. Refinancing of existing debt (e.g. Bank Debt, Trade Creditors, etc). Short term term working capital. Land purchase.

12 BANK FUNDING - AIB Other Loans SME Loan: New or early stage small businesses established in the last 3 years can avail of an SME Loan for amounts up to 100,000 A highly competitive rate of 4.4% p.a. variable applies to this Loan. This is a discount of 3. Flexible repayment py arrangements* including payment py holidays and interest only options may be negotiated in line with your changing business circumstances. Who can apply? New and early stage small businesses under 3 years old, Sole traders, Partnerships and Limited companies including Agri customers

13 BANK FUNDING - AIB Standard Business Loan A variable interest rate may be negotiated on a case by case basis Each loan application is judged on its own merits. Security may be required for business loans Stocking Loan: Rates negotiable between c. 4% and 4.5% Overdraft: Standard variable 7.85% New Business Account When you open our Business Start up Account, for the first two years AIBwill waive accounttransactions transactions fees, excluding cash handling fees Cash handling fees up to a maximum discount of 100 per fee quarter.

14 BANK FUNDING SME Loan: Enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding 50m. and/or annual balance sheet total not exceeding 43m. Rates typically 6.25% but scaled back based on risk Small Business Loan Rates vary between 5.74% for Secured and 6.74 for Unsecured Loans These rates are available to both new and existing Bank of Ireland customers and for every industry sector. Overdraft: Standard variable 8.05%

15 BANK FUNDING - BOI Business Support Fund Loans from 20,000 A competitive interest rate of just 5.75% (variable) Flexible repayment schedule with terms up to 7 years Other Loans Available Practice Development Loan Green Business Loan Farm Loans New Business Account For a start up customer you ll receive a range of current account banking services free of charge for two years including: No current account maintenance fees and transaction ti fees Free set up of standing orders or direct debits

16 BANK FUNDING SME Loan: Varying interest rates depending on purpose of funding Overdraft: Standard dvariable ibl 845% 8.45% Cost of 1.45% (Cost of Funds Rate is the interest rate which is applied to certain loans, overdrafts and invoice discounting facilities, primarily for business purposes) + Bank margin for risk Current Account: Free Fees for up to 2 years inc. cash handling* Free Internet banking for 12 motnhs Waive first lease transaction arrangement fee Merchant services fee waived

17 BANK FUNDING Ulster Bank Term Loan: A term loan is granted for a specific purpose and is repayable in amounts and over a length of time agreed between you and your Commercial Manager. Variable Rate Loan: Flexible borrowing that can be adapted to your specific business needs. Fixed Rate loan: Fixed rate loans help you plan for the future with interest payments that won't change over the term of your loan, typically up to 10 years. Business Development Loan A business development loan is a fixed rate loan providing medium term finance to individuals, partnerships or companies Loans from 1,250 to 300,000 Even if you don't hold a current account with us you can repay by direct debit from another financial institution Loans are available for business purposes only

18 LOAN GUARANTEE SCHEME In October 2012, the Minster for Jobs, Enterprise & Innovation launched dthe Credit ditguarantee Scheme Sh (CGS). The Scheme is targeted at commercially viable SMEs which, under normal lending criteria, are unable to obtain new or additional facilities from their Bank due to insufficient collateral or due to aspects of their sector, target market or business model being deemed to be high risk. Capped at 200,000, repayable over 3 years The Credit Guarantee Scheme provides Bank of Ireland and other lenders with a State Guarantee, covering eligible credit facilities for 75% of the facility value, over a three year period. The customer is required to pay a premium of 2% per annum, to the Government, on receipt of eligible facilities.

19 OPTION 2: MICROFINANCE Microfinance Ireland s objective is to provide additional lending to start up, newly established or growing microenterprises Loans up to 8.8% APR Qualifying Criteria Business LoansOnly applicants either via local CEBordirect Original lending must have been declined conventional bank funding to apply but will lend as part of overall funding requirement Need commercially ill viable ibl business proposal (business plan / 3yr cashflow) Turnover less than 2m; staff less than 10 Loans from Microfinance Ireland benefit from a guarantee issued under the European Progress Microfinance Facility established by the European Union.

20 MICRO FINANCE MFI hopes to assist 5,000 enterprises over the next ten years, creating an estimated d7, jobs. MFI has a greater risk appetite than banks Loans from Microfinance Ireland benefit from a guarantee issued under the European Progress Microfinance Facility established by the European Union.

21 OTHER IMPORTANT ELEMENTS Timings: Under the NAMA Act, the bank have 15 days to either approve or decline your loan application. Failure to respond within this time frame is deemed to be a constructive decline. Interest Rates: The bank will assess the level ofrisk in the application and price the loan/facility based on the risk. Different rates are available with different finance options, so check with your bank to ensure that you are using the correct type of finance solution for the business need.

22 OTHER IMPORTANT ELEMENTS Declines: Where an application for credit is declined, your Bank Relationship Manager must provide you with the reason(s) why the credit facility was declined. d In the event of a decline, you should consider the following options open to you: 1. In some instances, it may be possible to re-package the credit application in a way that meets both the business and bank needs 2. You can appeal a decline decision with your bank if you wish 3. You can seek an independent review of your bank s decision to decline by appeal to the Credit Review Office which I will explain further on

23 Option 3: Linked Finance Crowd Funding

24 Credit Review Office

25 Credit Review Office The Credit Review Office (CRO) is there to help SMEs & farms who have been refused funding to access bank finance. Established by the Department of Finance, under the section 210 of the NAMA act. It is a team of experienced (retired) lending bankers, chartered accountants and Enterprise Development Agency staff. Primarily the CRO works with AIB & BoI borrowers, but also have contacts in Ulster Bank (RBS Group) This 75%oftheSME / Farm market in therepublic

26 CRO History & Operations 2009 NAMA legislation / recapitalisation of banks Additional Goal ensure flow of credit to small business 4 Banks eligible (BOI, AIB, Irish Nationwide, & EBS) 2 lending to SME s AIB and BOI (approx. 60% of market) Commenced Operations April 1 st 2010 First cases in June 2010 Reports quarterly to Minister of Finance and weekly to DOF

27 Credit Review Office Operates with 2 full time staff and a panel of experienced Credit Reviewers. Remit is to ensure that viable SME s & Farmers have access to credit. Reviewers all have significant front line SME credit Experience. Reviewers engage directly with Borrowers if deemed necessary. Where decline decisions are being upheld a second external Reviewer opinion is sought. Deals with new and increased lending of up to 500,000.

28 CRO - Objective Two Aspects: 1) Credit Review Process ensure viable businesses get credit (like commercial ombudsman) 2) Monitoring and reporting banks target of lending 3bn each in 2010and ( 12bnin total)

29 CRO What it does The Credit Review Office may be able to help, if a borrower believes that they have been wrongly: (i) refused credit new, or additional facilities, up to 500K. (ii) have an existing facility withdrawn or reduced. (iii) have had fees or interest increased to unreasonable levels or have funding approved with unacceptable tbl terms and conditions

30 CRO What it does The appeals process is borrower initiated Step One Internal Bank Appeal The bank take another look at the case in some cases this results in an immediate resolution of the case Step Two Credit Review Office Appeal If this is unsuccessful the CRO will work with the borrower to: (i) In some cases recommend a straight overturn of the banks decision (ii) () Understand (and possibly correct) why the bank has said no (iii) Try to structure an alternative deal acceptable to the bank The CRO currently has step two success rate of over 50%

31 CRO Review Process Applications for new loans or restructured credit facilities up to 500K ( 500k incremental borrowing, not existing level of debt) EU SME Criteria: Up to 250 employees T/O up to 50M +/Or Balance sheet value 43M Company/sole trader/partnership t

32 CRO - Eligibility Borrower has a written application that was Refused Offered reduced amount Approved but with attached terms and conditions making loan unacceptable Or existing credit facilities removed and borrower believes bli bank actions unfair fi

33 CRO Record to 11 th January 2013 Cases Concluded Decision Upheld Bank Decision Disputed % Disputed Decision Reversed Credit Provided Jobs Protected AIB Bank % m 556 BOI % m 541 Total % m 1097 Banks Internal Appeal Statistics Cases Decision Bank % Decision Credit Jobs Concluded d Upheld Decision i Disputed Reversed Provided d Protected t Disputed AIB Bank % m 556 BOI % m 541 Total % m 1097

34 CRO ISSUES with some cases Borrowers concerned they will damage their relationship with their Banklong term. Lack of awareness of Credit Review Office. Not always being informed by the Banks of their right of appeal. Lack of confidence that t refusal will be overturned. Criticism of Credit Review Office by influential Journalists & SME Representative Groups. This is changing. Notprepared to invest the time andeffort is progressing anappeal.

35 CRO Grant Thornton Report November 2012 The CRO, through its general activities and day to day operations since establishment, is contributing to ensuring that credit is not refused to viable businesses with valid credit propositions; The CRO through its focus on monitoring the banks progress on meeting lending targets, its operations, activities, observations and recommendations and its regular interaction with Government is going a long way to assisting the Minister of Finance in facilitating the availability of credit

36 CRO Key Findings to Date Requests for credit are often poorly presented by Borrowers and often lack sufficient detail upon which to makean an informed creditdecision. Often the request for credit contain inadequate and/or poor quality financial information i with ihno clear business plan. Overhang of related property debt is sometimes being overlooked or not properly addressed in the credit request. Financial Accounts still being produced for filing purposes in too many cases. Some Accountants, Financial Advisers / Financial Brokers could do more to assist Borrowers in presenting credit applications. Borrowers not properly managing their relationship with their Bank.

37 CRO Sample Case (Successful) The borrower was seeking a Stocking (term) loan of 8,000 over 24 months 7 year personal account relationship with Bank Relatively new business, in existence for 15 months at the time of the request Previous successful appeal for 5,000 overdraft with the CRO

38 CRO Sample Case Strengths Well operated overdraft facility with the bank that was authorised by the CRO upon appeal Good relationship with the bank and previous borrowings repaid Request was for additional stock which would increase sales and represented under one months turnover Borrower grew this business from start up t and created tda modest profitable business.

39 CRO Sample Case Weaknesses The facility was proposed on an unsecured basis Personal debt position with another bank was concerning Bank would need some form of security due to personal debt position

40 CRO Sample Case Reason for Support Decent history with the bank Operates a controlled bank account and did not exceed limits Demonstrated ability to grow business into a modesty profitable business External debt position seems to be contained Recommended that the funding be approved but via a no.2 overdraft or stocking loan, priced at normal rates which would be appropriate for the risk

41 CRO Sample Case (Un-Successful) Borrower seeking 9,000 loan over 5 years in addition to current lending ( 3,500 overdraft facility) Funds are for advertising, i training i & equipment Borrower is operating in a partnership, generating revenue in a door to door approach In operation since 2009 Borrower had previous business that became unsustainable in the economic o c turndown

42 CRO Sample Case Strengths Currently operates a 3,500 overdraft facility with lender Good market research completed & sales projections provided appeared plausible Potentially viable business is funded correctly

43 CRO Sample Case Weaknesses Short term working capital funded over a 5 year period not always appropriate Current overdraft facility exceeded limits and had several unpaid amounts Projections understated expenses Difficult selling type i.e. Door to Door impulse buying market Limited repeat business due to product type on offer

44 CRO Sample Case Reason Bank Decline Upheld Undercapitalised business Proposed lending didn t seem sustainable based on projections Seed capital funding and R&Dgrants are better options which would not require immediate payback therefore aiding cashflow Unrealistic to ask the bank to take on more debt, as this was a high risk ikproposal due to the start tup nature of the company

45 CRO Some Findings SME s Fail to prepare, prepare to fail importance of business planning andforecasting Banks need to work on deal making Tiger Effect: Lazy Borrowers and Lazy Lenders

46 CRO Some Findings Continued Mostcases arerestructuring restructuring, not newnew money. Over 8bnwas sanctioned in 2012; of 2.5bn (27%) was new lending drawn down Legacy issues working capital used for capital items Legal issues Bad decisions made under pressure, not bad people Issues of Reserves/Capitalisation/Security (BTL) & Cost of Funds increasing interest rates charged increasing Demand is subdued at present but availability and Cost of Working capital will be key when demand strengthens and companies need to expand

47 CRO Some Findings Continued 1 out of every 2 credit applications refused by the bank are overturned by the Credit Review Office Helpline advice can resolve issues without a formal process Watchdog effect banks looking more closely at their decisions

48 BANK FUNDING SUMMARY Funding is available out there but business need to spend time and effort & get your model right before they submit an application For those with poor credit history it is more difficult but be upfront and you have a chance the credit review office is there as back up support for good ideas which cannot secure funding

49 BANK FUNDING SUMMARY

50 BANK FUNDING SUMMARY Suggest clients use a professional to help them get the funding needed

51 RULES OF ENGAGEMENT The aim of next few slides is to help bring clarity to the current realities of business / bankrelationships someofwhich of arestrained Know your clients rights: Code of conduct for lending to SME s Code of conduct of mortgage arrears Consumer protection code Right to review personal data via data access request Complaints and use of the Ombudsman, where appropriate

52 (1) KNOW YOUR BUSINESS No one knows your business better than you. You will have a very clear picture about the key strengths and weaknesses of your business and the opportunities and challenges you are likely to face in the future, i.e. your business story. Your ability to present your business story to customers is key to the success of your business. Equally, your ability to present your business story to banks, potential investors, etc. is critical to ensuring access to the required funding for your business. The key to securing adequate funding and finance for your business is that you must clearly demonstrate that your business is viable

53 (2) KNOW YOUR FUNDING OPTIONS Before approaching your Bank with a credit application, you should assess the full range of funding options open to you such as: 1) You Business Debtor, Stock, Supplier and Cost Management 2) Personal lequity 3) Private Equity Friends/Family, Business Angels, Venture Capital, BES, Seed Capital Scheme 4) State/EU/Grant Aid

54 Steps 3-7 of YOUR BUSINESS YOUR BANK Step 3 Preparing your Bank Credit Application Step 4 Bank Funding Options Step 5 Restructuring your Finances Step 6 Credit Pricing Step 7 How Banks assess your application

55 (8) WORKING WITH YOUR BANK & MANAGING YOUR FINANCES Working with your Bank: Useful tips to help develop a good working relationship with your Bank: Keep your bank up to date on a regular basis on how your business is performing and be open and honest even if its bad news. Be proactive and contact your bank to address any issues quickly. Present up to date financials on a regular basis and ensure the figures are accurate. Avoid delays submitting up to date information if it has been requested from your bank. Invite your banker to your premises so they are fully aware of how your business operates. Banks can also be an in valuable source of advice and information in relation lti to finance and other business matters don t tbe afraid idto contact t them.

56 (8) WORKING WITH YOUR BANK & MANAGING YOUR FINANCES Managing your Bank Finance: Useful tips to help develop a good working relationship with your Bank: Banks regulated by the Financial Regulator operate to the practices and polices outlined in the Code of Conduct for Business Lending to Small and Medium Enterprises. The Code promotes fairness and transparency in banks dealings with business lending. Don t go over agreed limits or break the terms of your loan agreement with your bank if at all possible. If you think you are going to go over your agreed limit(s) with your Bank let them know in advance and they may be able to temporarily or permanently increase your limit. If you do go over your agreed limit, you may incur increased fees and charges, including higher interest rates and it may affect your business credit rating.

57 (8) WORKING WITH YOUR BANK & MANAGING YOUR FINANCES Managing your Credit Rating: Useful tips to help develop a good working relationship with your Bank: Your business credit rating is critical to ensuring access to adequate funding for your business. The importance of a business s credit rating is even more important since the introduction i of a banking regulation called Basel lii. Basel II requires banks to hold sufficient capital to cover their credit risks. To meet this requirement, banks use a rating system to assess credit applications from business customers. The result of your business s credit rating will affect your bank s willingness to lend, the interest rate applicable and the conditions of the credit facility. Therefore businesses should ensure that relevant information is provided to their bank, not only at the time of a credit application but also on an on going basis, to ensure that credit ratings are updated as circumstances change. Be aware that if your bank debt goes 90 days in arrears, it is deemed in default and could affect your credit rating into the future.

58 (9) PLANNING FOR THE FUTURE Many business owners primary focus over the last year has been on the day to dayrunning andsurvival oftheir business. This is bothright and appropriate given the current trading environment. Equally important is the need to work on a long term strategy to best position your business into the future, with a particular focus on maintaining and growing your customer base and developing new products and services. Successful lbusinesses will constantly tl refine and reinvent ttheir business strategies and customer offerings. As a starting point you should consider focussing on the following four business areas:

59 (9) PLANNING FOR THE FUTURE Be Proactive. Planning ahead for future growth Actively review your business plan, maintaining up to date financial information and implementing robust cash flow and cost management processes will be crucial to managing future business performance. Be Effective. Deliver value from Marketing your business Effective Marketing can be crucial to generate business during a period of downturn. Consider more cost effective ways of marketing your business, such as e marketing, customer testimonials, etc. In an increasingly competitive arena, customers need to have confidence in your product and service offering, so ensuring value for money marketing spend is a must. Be Innovative. Capitalise on potential new opportunities Even in more challenging market conditions new business opportunities may arise. New opportunities can emerge from existing as well as new customers. Tap into the opportunities inherent in your existing i base such as referrals and cross selling. Consider diversifying. if i For example, growth may be delivered by simply adapting or extending a product range thereby broadening its appeal. Be Customer focused. Delivering excellent service While value is an increasingly important factor with consumers when assessing alternative product/service offerings, delivering excellent customer service remains the key to increasing customer retention, cross sell and recruitment.

60 SUMMARY Managing bank relationships or giving advice is a specialist service develop your knowledge in this area or avoid giving advice and refer to someone who is insured d& knows the rules We regularly receive referrals from brokers and appreciate and respect the line on these referrals we never cross sell to clients who have been referred to First Choice

61 First Choice Contact Details First Choice Financial Services Ltd, Ph Fax Web - Twitter