SUPPORTING BUSINESS - SOURCING FINANCE Helping businesses source finance
Helping businesses source finance These are challenging times for every business. The economic environment has changed and many businesses have been feeling the strain. We are ready to work with our Small and Medium Enterprise (SME) customers through these difficult times. We want to help you manage through the downturn and position your business for the economic recovery that will come. We understand that the particular needs of your business may have changed with the business environment. Now, more than ever, it is important for business owners to stay in touch with their bank and other finance providers. So do keep us up to date on how your business is doing and what your plans are; the more we know, the more likely we can help with your current and future financial needs. We have always been, and will continue to be, a strong advocate that banks and businesses must work together in addressing the challenges presented in what is an extremely difficult operating environment. We will try to be as accommodating as possible to meet your needs and respond in a realistic and pragmatic way. Whilst the credit process needs to be rigorous, we will take personal ownership of your request and make every effort to respond favourably, in as short a timeframe as possible. It is widely accepted that access to bank credit for viable businesses is critical to ensure that the SME sector survives the current economic difficulties and positions itself to benefit from an upturn, in time. 1
In circumstances where we have to say no to a request for credit, we will do it promptly, giving clear rationale for our decision and make every effort to work with you to find an alternative solution. We are very much `open for business and committed to providing financial support and advice to our customers, being mindful of the current realities we all face right now. This guide aims to help our business customers who are seeking bank finance from us. It explains the information we will need to make a credit decision. It also aims to explain how we price credit, and details different types and alternative sources of funding that may be appropriate to your circumstances. Our commitment to you We are fully committed to supporting our SME customers with a comprehensive range of financial products and services to meet your needs. We can also provide you with expert knowledge and advice based on our experience in the business market. In all our dealings with you, we are committed to acting with integrity and professionalism in the best interest of both your business and ours. We will: Approach each lending application on an individual basis Clearly communicate the cost, terms and conditions of credit sought Tell you approximately how long it will take to process your lending application and aim to give you an answer as soon as possible Give a clear explanation for any decision to decline a formal credit application Offer new and existing SME business customers an annual review of credit facilities, including any supporting security 2
Applying for finance When you come to us for bank finance, we will draw on our experience with SME customers and our knowledge of the business market. This is the background against which we will examine your business and your plans. As to the specifics of your credit application, we focus on five fundamental areas that we call the 5 C s (character, capacity, capital, collateral, conditions) which help us to arrive at a lending decision. It s worth giving some thought to how your business will stand up to assessment in each of these areas. This will help you assess your business s strong and weak points when submitting your credit application. Preparing backup plans or support for the weaker aspects of your business could make all the difference in accessing credit finance and also in ensuring your business s success. Character, Capacity, Capital, Collateral, Conditions Here s what we look for in each of the 5 C s: Character Capacity Good character is a basic prerequisite for any borrower. Honesty, integrity and reliability are the qualities that mean you will make every effort to repay your debt. In relation to your business, you need to be able to demonstrate that you are an effective manager with a good reputation. It s also important to be honest and upfront about your credit history and any business problems you may have had. How you resolved these will, of course, be helpful in determining how they affect your application. You will need to show how your business will generate sufficient cashflow to repay the credit facility you are seeking. Detailed financial forecasts must show how repayments will be generated. Beyond this, you will also need to explain your capacity to repay the credit facility if the business does not develop as planned. Other sources of income (such as investments), skills you could use to earn income, or the support of an earning spouse, could provide a sufficient backup plan. 3
Capital Business capital is split between equity (the money that the owners and investors have put into the business) and debt (money borrowed from banks or other sources). Equity capital acts as a cushion to absorb first losses, while debt capital must be repaid to the lender however the business fares. Since debt capital also comes at a cost of interest, the more debt a business has relative to equity, the higher the level of risk. Start-up businesses potentially can be a high risk for lenders, so if you are seeking to borrow money for a new business, like most lenders, we will need to see that you have made a reasonable financial investment. Collateral Collateral is the security given to a lender for protection in case the business cannot repay the loan. It can be any one of a range of business and personal assets, including buildings, vehicles, machinery, land title and business debtors. If the business cannot generate enough cash to repay the credit facility, the lender may have recourse to the collateral. But for us, as for most lenders, recourse to collateral is always the last resort: the business must be the main source of repayment and so credit will only be given if the business is assessed as capable of repaying the credit facility. It is always advisable to seek independent legal advice before providing collateral against credit facilities. Conditions Conditions and trends in your sector and the overall economy are crucial factors in determining the success of your business. Opportunities or threats to your business can arise from external factors such as technology, competition, regulation and economic or social changes. You may not be able to control all these factors, but you must be aware of them and be prepared to respond to change. When you look for bank finance, you need to be able to give your assessment of the market and how your business will cope with potential changes in market conditions. 4
Applying for bank finance your proposal Whether your business is new, well-established, or embarking on growth or diversification, we have the financial products you need. We are ready to provide bank finance for a sound and viable business with a well-presented proposal, based on a solid appraisal of the business and its future prospects. To access bank finance, your business must be able to generate sufficient funds to service interest and proposed loan repayments, while continuing to provide an adequate return to you and/or your business partners. Because bank finance is an investment in the future, you will also need to show that your business can survive the medium-to-long term. And, of course, we need to know that the business owners and managers have the skills and commitment to deliver the projected business results. Lending application checklist This checklist is a useful snapshot of the things we may need to see as part of a lending application. On occasion we may require additional information. Your Relationship Banker will be able to help you confirm what additional information may be required. Please note that you may not need to provide all of the information listed below in every case. For example, it may not be necessary for an existing customer to provide a business plan. The checklist can be used to help you ensure that you have gathered the standard information we will need to consider your lending application. If in doubt, please check with your Relationship Banker. 5
First, outline what you need State how much you would like to borrow because we need to quantify your request State why you would like the finance so we can check it is for a suitable business purpose and decide which type of finance best suits your needs State how long you would like the finance for we need to know the term of the loan to help assess affordability and ensure the right finance is suggested for your business needs Next, demonstrate your financial viability. This enables us to assess your ability to repay the loan. You may need to provide: Management accounts (if available) Cashflow forecast (template available from www.firsttrustbank.co.uk/business) Details of your business assets Business plan (template available from www.firsttrustbank.co.uk/business) Historic accounts (if applicable) Aged debtor and creditor listing Up-to-date statement of affairs Finally, consider and disclose any information that might help your application Profile of the owner and/or management team this helps us assess your capabilities The owner s investment in the business this shows your existing or proposed investment relative to the Bank s proposed investment Whether or not security is available to support your proposal Any other business interests this allows us to make an assessment which considers all of your existing commitments 6
Finding the right lending product for your business We offer several different types of lending products for business customers. Talk to your Relationship Banker to determine the optimum funding structure for your business. This is what will give your business the financial strength as well as the flexibility that it needs. An overdraft facility A business overdraft allows your business current account to go into an overdrawn position, up to a pre-agreed limit. In any 12-month period, an overdraft facility should fluctuate between credit and debit balances. Enterprise Finance Guarantee You may be eligible for lending under the Enterprise Finance Guarantee (EFG) scheme. This scheme provides loan guarantees to viable businesses for working capital and for business development and growth. The minimum loan amount is 1,000 and the maximum is 1 million. Contact us directly to discuss an application for a business loan under the EFG scheme. Confidential invoice discounting Many businesses have a significant amount of cash tied up in unpaid invoices. Invoice discounting is a quick solution to your working capital needs, providing a totally confidential debt-financing facility. With invoice discounting, we can help your business overcome cashflow problems by giving you immediate access to up to 90% of invoiced debt. As this is confidential your relationship with your customer is not affected. 7
Loan facilities Business loan finance can vary in term from 1 year to as long as 15 years. Where a loan is for the purchase of an asset, the repayment term will ideally be designed to tie in with the economic useful life of the business asset being funded. The title to that asset will typically be held by the bank as security for the business loan. Asset Finance Whether you re a small-to-medium sized business, a farmer or a large company, we may be able to offer you an asset finance package that best suits your needs. Our finance packages have been developed with you, our business customer, in mind. These consist of a range of practical ways to finance the purchase of equipment, commercial vehicles, plant and machinery. Note: You might also want to consider whether bank finance is your only option or whether your business is more suited to equity investment. For more information on other sources of funding, please refer to P11. Come and talk to us about our full range of business finance options or go to www.firsttrustbank.co.uk/business 8
Overview of SME credit pricing Following the economic downturn and the turmoil that has ensued in the wholesale money markets since the financial crisis, there are significant implications for the price of credit that have a direct bearing on the price paid by SMEs for loans and overdrafts. Ultimately the price of lending is determined by the market, and this section provides an explanation of the components of the interest rates paid by SMEs and some of the current issues that are impacting on the cost of credit. Interest rates charged for SME lending are generally made up of: 1. Cost of funds 2. Cost of risk and capital 3. Administration costs 1. Cost of funds There are two key ways banks fund their lending activity to SMEs: through deposit-taking from their customers and borrowings from wholesale money markets. Like any business, a major determinant of the price is the cost and availability of the raw materials. For a bank, that means how much it costs to gather the money that funds their lending through either deposits or wholesale money markets. When providing loans or overdrafts to SMEs, banks quote an interest rate made up of a cost of funds plus a margin. Wholesale and reference rates used by First Trust Bank are outlined here - First Trust Bank Base Rate First Trust Bank Base Rate typically follows the Bank of England Bank Rate but it is not guaranteed to do so. The Bank of England Bank Rate can go up or down and is announced by the Bank of England s Monetary Policy Committee every month. London Interbank Offered Rate (LIBOR) LIBOR is a daily reference rate based on the interest rates at which banks borrow unsecured funds from other banks in the London wholesale money market. Managed LIBOR Base Rate This is a variable interest rate and accordingly will change from time to time. It is reviewed on a monthly basis as a minimum. The rate is calculated on the last business day of each month using the average of the three month LIBOR rate published daily for that month. 9
Wholesale Money Markets Most banks use the wholesale money markets to source a proportion of their funding which they can then use to provide loans and overdrafts. The recent financial crisis has had a significant impact on these markets, with the result that the availability of funding has significantly reduced. As the level of funding available has decreased, the cost of this funding has increased for banks which, in turn, have had to increase the cost of finance for borrowers, including SMEs. In addition, in order to attract capital investors, banks will seek to generate a return for the shareholder for that capital, by way of profit earned from its margin. This return will also be a factor in the interest rate charged on lending. 3. Administration Costs There are costs incurred by banks in processing, assessing, approving and managing credit facilities for customers. Like any business, banks will seek to recoup the costs involved in, and associated with, these activities. 2. Cost of Risk and Capital The interest margin that SMEs are charged by banks reflects the probability, from the banks experience and data, that some of its SME customers will not be able to repay the debt. The methodology and calculations used to determine the cost associated with the risk of lending are set out under international rules by the Basel Regulatory Framework. Regulators also give guidance to banks with regard to the buffers needed to protect banks in the event of shocks to the financial system. To ensure customers confidence and the security of customer deposits, banks around the world are currently holding higher levels of capital in order to ensure that they maintain stronger capital bases than in the past. There is an economic cost associated with the holding of this capital and this cost is a factor in the interest rate charged on lending. 10
Other funding sources Bank finance is not the only source of funds for your business. Whether you are starting out or developing your existing business, there are other options. These include: Equity Equity is your investment in your business. If a business is to attract funds from external sources, it helps if the owners have made a financial commitment to the business. In particular, financiers of, and investors in business generally like to see a business promoter investing their own money in their business. It shows the promoter s commitment to their business, and reduces the overall level of bank debt needed to kick-start the business and to facilitate future growth. Government funding There are a range of funding options available from government-supported schemes. Invest NI is the main government agency responsible for the development and promotion of the business sector in Northern Ireland. Services provided by the agency include financial support and funding to enable businesses to compete and grow, so that they can contribute to regional and national prosperity. More information can be found on Invest NI s website www.investni.com Other support is available from: InterTradeIreland - www.intertradeireland.com Technology Strategy Board - www.innovateuk.org Department of Agriculture and Rural Development - www.dardni.gov.uk 11
Trade credit This is a period of time given to a business to pay for goods received from a supplier. It is negotiable and generally ranges from 28 days to 90 days. Business Angels These are private individual investors who invest capital in companies during the early stages of development. Business Angels usually seek active participation, contributing their business know-how or experience in company management. They also generally expect an equity stake in the business in which they invest. For more information www.bbaa.org.uk or www.nisp.co.uk/halo Venture capital Venture capital is money invested in innovative enterprises in exchange for a stake in the business. The standard time frame of the investment is three to five years, at which stage it is usually expected that there would be an Initial Public Offering, merger, acquisition or a buy-out. Venture capital gives your business a cash injection to fund expansion, product development or acquisition. Unlike more traditional forms of finance, periodic interest payments are not expected on the investment the payout comes at the end of the term. Your business can also draw on the expertise and advice of the venture capitalists. This could include commercial and strategic advice, a network of business contacts, an experienced director on your board, or assistance with staff and management development, fundraising or marketing. More information can be found on www.ivca.ie or www.bvca.co.uk EU funding The EU provides support to European SMEs in the form of grants, loans and in some cases guarantees. Support is available either directly or through programmes managed at national or regional level. SMEs can also benefit from non-financial assistance in the form of various programmes and business support services. More information is available on www.eif.europa.eu 12
Social and community lending Social lenders, such as Community Development Financial Institutions (CDFIs), are generally non-profit making, local organisations, supplying loans and credit to public and business members. Their purpose is to provide start-up and growth finance for small businesses and social enterprises that are unable to access funding from banks and other traditional sources. CDFIs can provide loans and investment to viable individuals and organisations who aim to benefit local communities or under-served markets with jobs and services. They are often connected to local partnerships and supported by local businesses, focusing on local enterprise creation. Find out more from www.findingfinance.org.uk 13
Information on Finance from First Trust Bank Your Relationship Banker is always ready to talk about your business and your plans for the future. To discuss your finance needs, phone your local branch today to make an appointment. More information on the material in this brochure is also available on www.firsttrustbank.co.uk/business Important information Credit Facilities Lending criteria, terms and conditions apply. Credit facilities are subject to repayment capacity and financial status and are not available to persons under 18 years of age. Security may be required. First Trust Bank Online and Phoneline Banking and ibusiness Banking Eligibility, terms and conditions apply to these services. For full details on First Trust Bank Online and Phoneline Banking, visit www.firsttrustbank.co.uk/onlinebanking. For full details on ibb, visit www.firsttrustbank.co.uk/ibb. Please refer to 'ibb Fees and Charges' for further details on fees and charges applied. The Lending Code First Trust Bank subscribes to The Lending Code. Details of the Code are available from the Lending Standards Board website www.lendingstandardsboard.org.uk The information contained in this brochure is provided for guidance only and what is considered best business practice. If you would like further information or would like to discuss any of our products or services in more detail, please contact your local branch or Relationship Banker. 14
If you need this brochure in Braille, in large print or on audio, ring 0845 6005 925 or ask your branch. Customers with hearing difficulties can use the Text Relay service by dialling 18001 0845 6005 925. Call into any branch Phone 0845 6005 925 www.firsttrustbank.co.uk First Trust Bank is a trade mark of AIB Group (UK) p.l.c. (a wholly owned subsidiary of Allied Irish Banks, p.l.c.), incorporated in Northern Ireland. Registered Office 92 Ann Street, Belfast BT1 3HH. Registered Number NI018800. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. FTM/BB54 09/14