Don’t bank on it!
With the latest ISME figures showing Ireland's banks have refused 52% of credit applications from the country's small and medium businesses, Gillian Hamill speaks to ISME CEO Mark Fielding and retailers to hear their views on how and why the system needs to change
Print12 April 2013
Ireland’s banks "are deleveraging through curtailing SME lending, thereby sabotaging the economic recovery through pure self-interest". So says Mark Fielding, CEO of the Irish Small and Medium Enterprises Association (ISME), who is clearly taking no prisoners when it comes to detailing the current woes of the country’s banking system. He has research to lend credence to his cutting words however, in the form of the organisation’s latest Quarterly Bank Watch Survey. Completed by 1,134 owner managers across the country, the poll shows over half of them were unsuccessful in their applications for loans.
This is obviously at odds with the banks’ own claims that eight out of ten credit applications from SMEs are successful. How then can such widely differing figures be reconciled? The ISME chief offers a few suggestions as to how the banks manage to report such impressive lending figures while maintaining a strict deleveraging regime.
Different definitions for refusal
He argues that SME owner managers and bankers have contrasting views about what constitutes a loan refusal. A business may be "discouraged from coming in in the first place", says Fielding. "If you ring up your local bank manager about a loan and they say don’t bother coming in here for the moment or whatever, that to a small business is a refusal; to the bank, it’s not."
Another scenario that can occur is if an owner manager brings in all their paperwork and accounts and the bank says it will examine the possibility of granting a loan. At the very end of the process, the bank manager might say they will seek an agreed amount for a business but that they need collateral and the deeds to a property in order to proceed. "If an individual then says they don’t have collateral, in some cases that may not be counted as a fully completed application," says Fielding.
"The banks say 80% of fully completed, formal applications are granted," he continues. "We would say that they should be giving loans to 100% of fully completed, formal applications.
"There’s also an issue where an owner manager is looking for say, €100,000 and the bank says we’d love to give you a loan of €100,000 but we can only manage €50,000. The bank look on that as a positive. However from an owner manager’s point of view, he’ll say I can’t take €50,000 because that project needs €100,000 and if I only take €50,000 I’m only halfway there so I need the whole amount."
What’s more, Fielding believes the banks include lending to the agri-sector in SME figures in order to "puff up" their credit records whereas in the association’s view, this represents a separate sector which should be treated as such.
Another serious problem with Ireland’s banking system in his view is a notable lack of expertise in our bank branches.
"There has been a flight of expertise out of our banks for too long and over the last maybe 12 years or so, banks became glorified building societies that were lending out money on foot of property so they never had to look at the risk end of the business," the ISME CEO says.
ISME CEO Mark Fielding believes Ireland’s banking system needs to do more to support viable SMEs
Old school bank manager has left the building
"If you go in looking for finance based on the risk of your business, based on your future cash flow and your ability to repay your debt, that has nothing to do with the property behind your business. Unfortunately the old fashioned bank manager has left; the manager who knew your pedigree and knew if you were going to be a good or bad risk and who was also able to read your accounts and your cash flow and be able to say yay or nay, and in doing that was able to give advice.
"For the first two and a half years after the crash of 2008, the banks were in total denial about that," says Fielding. "However we now hear that they are sending – I won’t say surreptitiously or under the cover of darkness – but they are sending some of their staff into the likes of Enterprise Ireland to learn how to assess risk. Yet that’s going to take a while to get bedded in."
Margaret Lunney of Lunney’s Gala in Carrick-on-Shannon shares the view that it is becoming increasingly hard to build personal relationships with local banks. She tells ShelfLife: "We deal with AIB in our day-to-day banking and they’re good but what we’ve found in the last year or two is that they’re trying to distance themselves from the customer and it’s getting harder and harder to deal just on a one-on-one basis and to build a relationship with the bank. It’s not the guys on the floor’s fault because they’re only taking orders from on top but we find we can’t ring the bank directly, we get through to a call centre."
‘Normal profits’ should be the goal
While Fielding highlights the problems besetting the banking sector, he is also quick to point out the realities of the many difficulties facing SMEs. "As we all know the recession has cut deeply into the SME sector and that would also be one of the reasons why the refusal rate has gone up of course," he says. "If a business is not going to survive we can’t expect the banking system to give them money…What we’re trying to do is protect viable businesses that may be vulnerable at the moment but are quite viable if they just get the support from a banking system that should be more willing to help them get out of the recession and help the economy.
"Bankers are profit earners for their shareholders and we have no problem with that as long as it’s normal profits," he continues. "For too long, they were super profit earners that were making massive amounts.
"Any of the surveys that were carried out internationally would show the Irish banking system to be, if not the top, one of the top three in the world for profit alone. They were really gouging our customers here.
"We would love to see our banking system back earning profit but not on the backs of the SMEs and again that has always been an issue in that the banks have always charged more to SMEs on lending rates than they have to multinationals. Those margins have actually increased over the years."
RGDATA slams ‘cynical’ AIB decision
In fact, retail lobby group, RGDATA recently urged Finance Minister Michael Noonan to intervene to stop AIB from increasing transaction fee charges on business current accounts by up to 165%.
RGDATA reports that from 1 June 2013, AIB intends to scrap 17 cent and 25 cent transaction rates for lodging cash and charge a standard fee of 45 cent per €100 lodged.
The organisation describes the move as "cynical in the extreme" as it claims AIB is aware how difficult it will be for many of these customers to change banks.
Is change afoot?
Fielding believes the first step the government needs to take in improving the situation is to "stop believing everything that comes from the banks…The previous government was led around by the nose for years by the banks. This government in the first two years of its existence seems to have almost followed suit.
"However slowly but surely, we’re seeing a change in attitude and what we hear now is the Minister for Finance saying I can’t believe what I’m hearing [from the banks] which is what we’ve been saying for many years."
He also believes that following years of lobbying the government has introduced several programmes which will benefit the SME sector such as the micro-finance scheme, which can lend up to €25,000 to micro businesses with less than ten employees. A partial guarantee scheme also came into existence last year whereby if a business doesn’t have sufficient collateral the government will step into the breach. While Fielding is encouraged by such initiatives, he says that ultimately, "until such time as we can get banks with the proper expertise to be able to look at financial accounts and be able to assess the risk without scurrying back to see what collateral’s involved, we’ll be in trouble".
Securing a loan
While ISME’s latest banking survey reveals the extent of the difficulties facing small businesses, that’s not to say securing credit is an impossible feat. ShelfLife spoke to two retailers who have been successful in their loan applications to see what lessons can be learnt
Cathal Talty of Talty’s Mace in Lisseycasey, Ennis, Co Clare, says the family business enjoys "a healthy relationship" with its bank; namely, the Bank of Ireland in Ennis.
"The business is 39-years-old this year and it’s stood the test of time. I suppose that stands for something when [the bank] looks back through the books and sees how we’ve been getting on with them."
The Taltys successfully applied for funding in order to complete a new forecourt in October 2010 and finish a full in-store renovation by November 2011. They were fortunate enough to have an associate who is an accountant to do "a lot of the groundwork for us in preparing the application forms".
Every situation is different
In total, Cathal Talty says the entire process took approximately "six to seven months from start to finish". When asked if he believes the banks are still lending to SMEs he says: "On experience we have to say that we can see they are [but] I suppose every banking situation is different."
On the topic of what advice he would give to other retailers, Talty replies: "If there are issues or if there is something that you can foresee causing a problem, it’s to be upfront with the bank, to face it before it becomes too much of a problem…that’s how the trust will be built up."
Retailer Jerome Griffin has been in the retail trade for a significantly shorter period. He opened his first store in October 2010; XL Hannah Mary’s Country Store in Tullig Lower, Killorgan, Co Kerry, after securing a bank loan.
Opening a second store
"Very satisfactory," is how he describes his relationship with his bank, AIB in Killorglin. In fact, Griffin has been successful in his application for a second XL store in Kilgobnet, Beaufort, which only opened very recently, during the Easter Bank Holiday weekend.
The retailer describes the paperwork involved as manageable. "It involved preparing a basic business plan which included proposals on how the shop would be renovated and any new services that I’d be providing in the new store as well as the finance projections that I would have had based on Hannah Mary’s Country Store."
Griffin was pleasantly surprised by the amount of time it took to receive his answer; "only a couple of weeks."
"I know I hear all the stories out there that [the banks] they’re not giving credit but I’m only in business since October 2010 and just over two and a half years later I’m expanding into my second store and the bank is coming behind me again so I’ve been very happy with them."
Preparation is essential
His main advice is to be prepared when dealing with the banks, have all your financial projections ready beforehand and "establish a principal contact within the bank".
He concedes though, that at the beginning, he was "dubious" about the idea of approaching the bank to open his second store. "When the opportunity of the second store came up I was thinking how am I going to finance this? The opportunity was too big to let go," says Griffin.
Symbol group support
"The catchment area in the new store is as strong as where I am at the moment and I was thinking am I going to go to friends and family for finance…One day I just said I’m going to approach the bank. I was dubious going into them but when I did approach them the bank manager was very open to the projections that I had."
Griffin feels his partnership with the BWG Group’s XL brand also worked in his favour. "That had a very positive impact on it," notes Griffin. "I got help from the sales representative from XL in producing the projections for the business and the sales and overheads etc. The bank could see that they were putting a lot of work into it as well. I think being with a symbol group does make your case stronger."
How the ‘big four’ size up
ShelfLife asked Ireland’s ‘big four’ within the banking sector – Bank of Ireland, Ulster Bank, Allied Irish Bank (AIB) and Danske Bank (formerly the National Irish Bank) the same questions about the type of credit they offer small and medium retailers and what their processes involve to see how they compare with one another. Here’s what they had to say
Ulster Bank
"We believe in the quality and potential of small businesses in Ireland and acknowledge the vital role they play in the economy. We have a range of funding options available to support viable business propositions and support SMEs through a wide range of banking services including a competitive suite of credit facilities to assist their businesses develop and meet their changing banking needs."
"Further information on business loans and finance, including a link to our SME business lending application form is available at: http://www.ulsterbank.com/documents/ROI/Business/SME-Business-Lending-Application-Form_ROI.pdf."
Bank of Ireland
Information required can differ based on the specifics of any given case; the following information is a guide:
Required paperwork
A completed application form for borrowings or a business plan is required. Key information sought will include:
„ Background, experience, skill set of business owner (if not known to the bank)
„ Purpose of the facility – working capital and/or asset finance
„ How much is required and for how long
„ Owners’ input if relevant
„ What is the source of the repayments?
„ Is security available?
Financial information sought might include:
„ Up to date financial and/or management accounts (Financial/audited accounts not always required and particularly not for smaller amounts, however, key management information such as aged listing of debtors/creditors and up to date stock figures – particularly relevant for retailers)
„ Cashflow forecast – usually for a 12 month period
„ Financial projections – for larger capital projects
„ Confirmation of tax status
„ Personal ‘statement of affairs’ – sets out the financial position of the owner
„ Any other financial information deemed necessary to that particular application
„ The primary purpose of seeking financial statements is to establish if repayment capacity exists at present and is likely to exist throughout the period of the borrowings.
Is collateral needed?
The bank may take security to mitigate risk, however, the primary [factor] is the business/owner’s ability to repay and security is always final recourse.
The level of collateral required is dependent upon a number of factors, including the extent of the exposure (small business loans <€25,000 are often on an unsecured basis)
Typical timeframe
A temporary overdraft request for an existing retail type customer would usually be responded to within 24 hours. For standard loan applications, turn-around time is usually within 2/3 working days.
Allied Irish Bank (AIB)
John Irwin of AIB Bank examines some of the issues retailers need to think about when applying for loans.
Our primary criteria in advancing new credit facilities or refinancing existing facilities, is ensuring that there is adequate cashflow generated by the business to service the credit facilities sought. In making an application to the bank for credit, retailers like all other borrowers should follow four simple steps:
Step 1 – Before preparing any application for credit, contact the branch relationship manager and advise them of the fact that you are seeking a loan. At this initial stage the bank will outline the key information it will require and provide an application form. We would strongly recommend that all business customers seek advice in preparing their application (particularly for more complex credit applications) from their accountant or business advisor.
Step 2 – Prepare your standard AIB credit application form.
Step 3 – Gather the relevant information that the bank requires to support your application. The information requirements will be outlined during step one above and will vary depending on the size and complexity of the application.
Step 4 – Arrange a formal meeting with your branch, submitting your application form and all the information that has been requested in step one above. The aim of the meeting is to give you the opportunity to talk through the details of your application and ensure that the bank has a full understanding of the business and the nature of the business proposal.
Response normally takes 15 days
The length of time that it takes for a bank to analyse and respond to the request will depend on the nature and complexity of your requirements. Assuming that all relevant information has been made available, you could normally expect to hear back from your bank within 15 business days.
In November 2012 AIB also introduced a streamlined lending process for lower value loans up to €25k. Subject to simplified criteria, viable business borrowers are able to secure a decision on their formal loan applications for up to €25,000 on a next-business-day basis. Decisions in relation to credit applications under this process are made in the local bank branch. The loans are available for working capital, investment and expansion activities and are available to customers who have banked with AIB for the past 12 months.
Collateral
In relation to security the requirement will depend on the purpose for which the loan is being provided. If for example the loan is to purchase new premises etc, then a legal charge is normally taking over the property itself. Where the retailer is incorporated and trading as a limited company, a personal letter of guarantee from the directors may be required. The ultimate credit decision by the bank will be based on the capacity of the business to generate sufficient cash to service principal repayments as they fall due.
In overall credit terms the retail sector represents approximately 20% of AIB’s SME loan book and in 2012 15% of new credit was into the retail sector. Not only is AIB open for business, but our own future viability is highly dependent on lending new money to businesses across all the SME sectors including retailing.
Danske Bank
Required paperwork
Any application to Danske Bank should include a business plan including projections and cashflow. Access to historic financial information such as profit and loss accounts, balance sheet and management accounts can also help the bank to understand the customer’s business more fully.
Is collateral needed?
Generally, yes. Each application is considered on a case-by-case basis. The bank does not impose unreasonable collateral requirements, but it does take into account the nature, liquidity and value of the collateral offered.
Standard timeframe
Each application is considered on a case-by-case basis. However, once the bank has received all of the information required to consider an application, the average timescale for processing loan applications is approximately two weeks for overdrafts, loans and term loans, and approximately three weeks for invoice discounting applications.
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