Banking on the right support

Sunday Business Post - News Feature - Jan 11 2009

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Bank of Ireland’s Business Support Fund (BSF), which was launched last December, will help viable businesses to overcome trading difficulties brought on by the recession, according to Damian Young, head of small business, Bank of Ireland Business Banking.

The €250 million fund will be used to target small, indigenous businesses.

‘‘We wanted to demonstrate our commitment to the small and medium enterprise (SME) sector in Ireland by allocating specific funds to support businesses going through the current economic conditions,” Young said.

He said the support fund was designed to help fundamentally viable and sound businesses that are going through cyclical change due to the conditions in the market.

Applying for funding

Businesses can apply to Bank of Ireland for funding under the scheme in a number of different ways.

‘‘With the Business Support Fund, we are doing things like extending existing debt over longer repayment schedules,” said Young. ‘‘We are also providing moratoria to businesses so they can stop repaying their existing debt over a period of time to give them that flexibility and breathing space to get through the current turmoil.

‘‘We can restructure existing debt so that people can do smaller repayments now, and payments will increase then as their working capital requirement changes.

‘‘Where businesses have an existing overdraft facility that is coming under pressure as they are not getting paid quickly or because suppliers are looking for cash payment upfront, we can change an overdraft facility to a term facility so that it can be spread across a period of time.

‘‘The support fund is there for businesses that need additional borrowings, or new borrowings in the case of existing businesses who did not need to borrow to support their business previously.”



Term facility

Money made available to SMEs under the scheme will be provided as a term facility only with no arrangement fee.

The terms of the loan will depend on the company’s business needs, but maybe extended for a period of up to seven years. The fund is open to sole traders, limited companies and partnerships.

Young said that the amounts available, and the terms of the loans granted, would depend on the nature and circumstances of each individual applicant.

‘‘This is a tailor-made loan for businesses,” he said. ‘‘We are not putting any restriction on the upper limit available, but we are saying about €150,000 or €200,000 in most cases.

‘‘€20,000 is the nominal lower limit, but we are very flexible there as well. We are looking to see what is needed to support the business over the next 12 to 18 months, and how to best structure it over that period, which will be the critical time.”

Future plans

Young advised business-owners hoping to secure BSF funding in the present climate to put together a detailed business plan with in depth and specific details, bearing in mind the difficult trading conditions currently in play.

‘‘We want to see what the business is going to do with the money, including their business plan and projections for how they are going to trade through the current difficult environment,” he said. ‘‘We need to see that it is a sound viable business, which can trade through the next period of time.”

Young said Bank of Ireland business managers had certain criteria they would use to assess each application for BSF funding.

‘‘We want to see if they are looking at new markets,” he said. ‘‘Do they have a new product or innovation? Are they reducing their costs or sourcing materials from different suppliers?

‘‘Are they looking at more effective debtor collection systems and are they over exposed to any one particular debtor that puts them at risk going forward? Small businesses in any environment need to continuously look at their business plan and cashflow, if they do not do that they will find themselves in trouble.”

Business records

All companies should keep up-to date financial records in the current turbulent climate.

‘‘These should not necessarily be formal, audited accounts, but should include information on debtors, creditors, how much stock the company has, how long it has had that stock and how much is the stock worth,” Young said.

‘‘The SME owner should be able to update the bank on their current position. The bank then has up-to date information on how the business is doing, and can therefore make informed decisions based on that.”

Banking relations

Young advised SME owners to talk to their bank as soon as they current credit limits. ‘‘If you require additional debt, come and talk to the bank beforehand, do not just write the cheque,” he said. ‘‘Banks generally do not like surprises, so do not assume that an additional facility will be there whenever it is needed.

‘‘We are happy to sit down with any business and talk about restructuring debt or looking to see if existing debt is sustainable over the coming months. Agreeing beforehand protects the SME’s credit rating across the board, which is vitally important at the moment.”

Current difficulties

Young said the recession was affecting smaller businesses in a number of different ways.

‘‘Payment days have increased quite significantly and SMEs are waiting longer to get paid by debtors,” he said. ‘‘Average ‘debtor days’ are now 67 working days, which means the working capital requirements of a business have changed dramatically. Companies are looking to extend their own overdraft facilities, and to restructure their facilities to meet changing working capital requirements.

‘‘General market factors are another issue. Businesses are getting hit by declining consumer sentiment, retail sales are falling and businesses are coming under more pressure than they had been. This is not unique to Ireland. This is happening across the globe in the current environment.”

The capital structure of some newer businesses is a concern in the current climate, Young said.

‘‘Some smaller companies, particularly ones that have been set up in recent years, have been reliant on interest bearing debts to support the business,” he said. ‘‘When the economy changes and there is more pressure on cash, in a lot of cases there is a need for more equity in put or additional debt.”

The recent fall in the value of sterling relative to the euro has hit some smaller Irish businesses hard.

‘‘A huge number of SMEs are coming under significant pressure due to the near parity between sterling and the euro,” he said. ‘‘That is a 20 or 25 per cent difference from 12 or 18 months ago, which is eroding margins significantly.’

Funding new business

While the BSF is targeted at more established SMEs, Young said Bank of Ireland was also eager to speak to entrepreneurs looking to set up a new business in 2009.

‘‘For brand new businesses, we have a separate fund called the Developing Business Loan fund,” he said. ‘‘That has been running since 2006. In 2008, we upped the upper limit available to €50,000. It is an unsecured loan, so the entrepreneur does not to have tangible assets to secure it against.”

Young said that entrepreneurial activity w s continuing in Ireland, despite the downturn.

‘‘We are still seeing good activity in the Developing Business Loan fund despite the current environment,” he said. ‘‘There are still businesses being set up. There are still people coming to us looking for finance, and we are still supporting those businesses .Our activity in that is running at an average of €2.5million a week being provided.”

Start-up plans

Young advised entrepreneurs seeking bank funding to factor the current difficult economic climate into their start-up plans.

‘‘In the current environment, businesses coming to look for new funding should be prepared with evidence of how they are going to run the business over the next 12 to 18 months,” he said. ‘‘They should have a detailed business plan with cashflow projections, cost control measures, debtor collection plans, new markets or product innovation plans.”

According to Young, it is never too early to approach a bank for a chat about a new business idea.

‘‘The bank is not just there to give you a loan; it is a source of advice, support and direction,” he said.

‘‘Feel free to go in and meet with the business manager and talk to them about the idea and what type of things you should be looking at. You can then go away and prepare the plan a bit further before a more formal meeting with the bank about cash requirements.”

Business basics

Young said the same key business fundamentals applied in any economic climate.

‘‘Have a very good business plan and ensure it is your own and not somebody else’s,” he said. ‘‘The business plan should reflect the passion that the entrepreneur is willing to put into the business. Research the market very well. Understand the upsides, but also the downside, so that you have researched what can go wrong. Be prepared to work hard and manage the finances.”

Banks are generally keen to see the entrepreneur is showing a personal financial commitment to a new business, according to Young.

‘‘Make sure you start off on a good footing in terms of capital structure,” he said. ‘‘There should be signs they are putting their own money into the business, and that they are looking to the bank to provide a similar level of funding.”

Start-up trends

The number of new businesses created in Ireland fell notably last year, according to Damian Young, head of small business at Bank of Ireland Business Banking.

‘‘We do a barometer of start-ups and the first nine months of 2008 saw a 20 per cent drop off in the number of start-ups in Ireland,” Young said.

‘‘The final three months of the year, however, were the most difficult of the year, so we would expect that the overall start-up figure would be around 14,000 to 15,000.”

Bank of Ireland’s Start-up Barometer showed that the number of start-ups in Ireland in 2007 totalled 18,740. This represented a considerable drop over 2006, when 19,221 start-ups were founded.

Young said the fall in construction and related sectors accounted for most of the recent drop-off in start-up activity.

‘‘The shortfall was predominantly in construction, or construction-related sectors, which saw a 43 per cent fall in businesses being set up,” he said. ‘‘The non-construction related businesses were down in the first nine months of last year by only about 7 per cent. Certain services and retail operations would also be down on 2007.”

Low levels of start-up activity prevailed in all sectors last year, according to Young.

‘‘No one new sector really stood out in 2008,” he said. ‘‘The technology businesses were a little ahead of the previous year, and there are more niche businesses being set up in those areas.”‘ The downturn is affecting the type of new businesses setting up in Ireland.

‘‘In the current environment, you will get different types of start-ups,” he said. ‘‘You sometimes see stronger, more focused businesses being set up in a downturn. We see very good expertise coming from multinational companies that are downsizing or scaling back establishing niche businesses that have the capacity to internationalise and export. Those are the type of businesses that will add value to Ireland Inc going forward.”

Young welcomed the government’s commitment to support entrepreneurs in 2009.

‘‘The government’s new initiatives with regard to research and development are very positive,” he said. ‘‘Ensuring that businesses are putting capital into developing their own businesses is going to be important going forward. The likes of the County Enterprise Boards and other support organisations will be focused on supporting new businesses in 2009 as well.”

Bank of Ireland will expand the supports it provides to new companies this year, according to Young.

‘‘We are committed to continuing and enhancing our business start-up package this year,” he said. ‘‘In 2009, we want to be even more active in local markets, in terms of supporting businesses and providing advice and direction to them.

‘‘We have a partnership with Kernel Venture Capital to provide equity capital into new and developing businesses and we have been probably the most active bank in Ireland on the VC side of things.

‘‘We have a number of initiatives looking at business innovation and how we can support more innovative businesses. I am reasonably optimistic for 2009, even though it is going to be very tough here.”

Young said he did not expect any major drop in the number of new businesses setting up in Ireland this year, compared to 2008.

‘‘It is hard to say at this stage, but I would predict that it will be at a similar level to last year,” he said. ‘‘We will take out the element that would only be there in a boom time, but there is a core that might see the figure at around 14,000 next year. We are not going to go back to a stage where we would see fewer and fewer startups.”