BANK CREDIT. How to Engage with your Bank - What they Expect from You. Catherine Collins Credit Review Office. Finance 4 Growth 18 th October 2017

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1 BANK CREDIT How to Engage with your Bank - What they Expect from You Catherine Collins Credit Review Office Finance 4 Growth 18 th October 2017

2 Credit Review Office Mission - ensure the credit system operating effectively for small and medium-sized enterprises, incl. sole traders and farmers. Simple and effective review process for businesses refused / reduced / withdrawn credit by bank (AIB, BOI, Ulster, PTSB) Information and Helpline Reviews refusal/restructure/refinance of up to 3,000,000 (small fee) Small staff and a panel of experienced Credit Reviewers Reviewers engage directly (phone/ ) Recommends credit facilities be provided in > 50% of cases

3 Sources of Funding Internal Equity bootstrapping/promoters/managers External Equity typically large investments, small number of businesses each year (numbers in low hundreds) Bank Debt/Credit - Majority of Irish SME s seeking External Funds use Bank Debt/Credit (hundreds of thousands) Alternative sources of Debt What is happening in the Bank Credit landscape?

4 Business Life Cycle and Funding Bank / Debt

5 Irish SME Banking Landscape More positive economic conditions, improving financials for SME s Majority of applications are approved/partially approved (80-95%) STRUCTURAL CHANGES Bank Concentration Automation of Banking relationship fast binary decisions, lack of RM Refinancing of debt sold to hedge funds Equity gap

6 CREDIT AND BANK DEBT Banks lend to Low/ Medium risk SMEs The SME side The Banks side Bank Boards Credit Risk Appetite, Lending Policies, Regulation and Capital Adequacy VIABILITY GOING CONCERN KEY = Cashflow/ EBITDA - Sufficient future free cash to make projected repayments - Are the projections credible? CREDIT TRACK RECORD -Account operation -ICB STAKE Banks -V Other Stake in the project (60-70%) SECURITY Quality and Realisability SECTOR Exposure to Market/ sector 6

7 Common Problems with SME Credit Applications Requests for credit may be poorly presented by Borrowers no clear business plan lack sufficient detail inadequate and/or poor quality financial information Financial Accounts still being produced for filing/tax return purposes info too old in times of rapid business change Financial Advisers to assist Borrowers in presenting credit applications, but promoter must own plan. Managing your bank interactions keep the record clean

8 Banks and SME Credit Applications Strict credit policy and little flexibility in waiving policy. Automated decision making Disconnect between Relationship manager and Credit section within bank. Mixed Messaging open for business with money to lend but focus on easy cases/good sectors Open For Business Food & Agriculture. Minimal 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. Viable SME at risk where they are directly or indirectly supporting unviable property enterprises.

9 3 Parts to the Credit Process Step 1: Make the application Step 2: Bank Credit Assessment/ Credit Approval Step 3: Drawdown

10 How to Make a Strong Application This is a sales pitch you are competing Preparation is Key documentation required includes Business Plan financial reports and cashflow projections: REALISTIC Statement of Affairs/Asset and Liability profile of owners/promoters Confirmation that tax affairs in order Details of Security on Offer Clear Aims/objectives: Convince bank proposal is viable Ensure your RM (agent) understands your business Confirm all the information needed has been provided Add a proposal document to the Application Form Support bring someone with you accountant/adviser Establish timelines and follow up proactively

11 Credit Assessment KEY: Demonstrate Viability / ability to repay Promoters Experience/Capability/Track Record (Business & Credit History) What market is the enterprise involved in-growing or declining? Competition? Past Performance - historic profit/cash flow (past 2 years may not be indicative) Future Potential - projected profit/cash flow how will business model change Performance against projections so far Sales pipeline Aged Debtors and Creditors Existing Debt incl Statement of Assets and Liabilities of promoters

12 Credit Assessment Viability ability to repay and to continue operating Must meet Bank Criteria / Tests Stake Loan to Value Term of loan Stress Testing / Sensitivity Analysis Interest Rate - increase 2%

13 Finding Solutions VIABILITY GOING CONCERN STAKE Banks -V Others SECURITY Quality and Realisability SECTOR Exposure to Market/locality Overall aim: reduce risk Viability/Going Concern : consider when applying improved clarity, up to date financials, address total connection, company structure, shift in business model, third party validation Shorten loan period/reduce risk to bank//match to use of funds Seek low cost or flexible funding Strategic Banking Corporation (SBCI) Banking ratios interest cover, Loan to Value, sensitivity analysis Stake directors loans, equity investment, Microfinance Ireland, angel investors, EIIS, ISIF Security tangible assets, govt. guarantees (CGS) Sector know your sector very clearly

14 Drawdown Terms and Conditions devil in the detail Security takes much longer to get to drawdown Allow far more time than you think you will need

15 Access to Credit - Government Supports Access to Bank Credit - main source of funding for majority of Irish SME s 4 main Government initiatives to ensure credit is available for viable SME s addressing market failures 1. Credit Review Office 2. Credit Guarantee Scheme lack of security/novel concept 3. SBCI/ISIF cheaper funding/alternative providers 4. Microfinance Ireland Microenterprises, up to 25k, less risk averse Updates: SME ONLINE TOOL

16 Credit Review Office Summary Businesses are starting/growing and need funding credit and equity/owners stake Credit is harder to get in recent years, and can cost more in Ireland Fail to prepare, prepare to fail Use all the tools in the Credit toolbox to de-risk/reduce risk for bank, and cost for the borrower A negotiation process- informed borrowers do better

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