EVEN if the IMF thinks the economy will grow slightly next year, the plight of businesses desperate for finance is unlikely to get easier anytime soon.
Many businesses continue to face an uphill struggle when applying for bank loans, according to a report published last week by the Credit Review Office, which reviews business lending by AIB and Bank of Ireland. The report found that banks have tightened their lending policy for "marginal" or "currently challenged" small and medium-sized businesses. And after four years of recession, what business is not "challenged"?
Even so, a bank loan could be the cheapest way to raise money, so it's worth following a ground plan and hope that it gets you the thumbs up from your bank.
PUT IT IN WRITING
Even if you don't think you have a chance in hell of getting a bank loan, or if your bank manager has told you not to bother applying, make a formal application.
"Put it in writing," said John Trethowan, head of the Credit Review Office. "If you don't make a formal application, you won't be able to make an appeal [to the Credit Review Office] if your bank doesn't give you the money."
This applies even if you've made a disastrous decision in the past.
"A lot of businesses are under so much pressure," said Trethowan. "People under pressure do strange and stupid things. But even if you have made a mistake in business, if you can show your lender that you can turn around the business, you may still be able to get a loan. If you continue to make mistakes, however, you're unlikely to have much luck with your bank."
DO YOUR HOMEWORK
The more preparation you put into your application for a business loan, the better your chances.
"Fail to prepare; prepare to fail," said Trethowan. "If you don't have a well-argued business case or idea, you won't get your money. Banks expect a borrower to have a credible plan showing how they will repay the loan. That could involve the sale of an asset, or it could be money from a life policy that is about to mature."
ARE YOU WORTH IT?
To secure finance from a bank, you must also prove your business is viable -- or potentially viable.
You must show that your business has traded well over the years -- and will continue to trade into the future. You must also show that your business has a good credit history over the last three to five years. To be viable, your business must also be solvent -- or in a position to return to solvency within two years.
If you're a start-up, you're unlikely to have a credit history, but the personal credit or financial history of your business's promoters should suffice. Start-ups won't have a history of trading either, so you will have to prove that your business will be able to make money and generate cash. Whether you're a start-up or not, you must have a business plan showing your financial forecasts for the future.
"You'll need three years' projections of profit and loss, balance sheets and cashflow," said Mark Fielding, chief executive of the small and medium-sized business lobby group, Isme. "The cashflow projections for the first year should be for every month. After that, it should be enough to have projections every quarter."
A spokeswoman for BoI said the key to a successful loan application was "to make the best possible case for the business". "Having a well-worked cash flow is vital," she said. "Having up-to-date financial information is essential. Understanding the working capital cycle in a business is valuable as it helps to identify the amount of money the business has tied up with funding day-to-day operations."
SHARE THE RISK
During the boom years, banks were often prepared to take on the full risk that came with a business loan. However, banks today are not willing to take on more than 65 to 70 per cent of the risk, according to Trethowan. As a result, businesses often have to stump up at least a third of the money raised. That could involve putting some company money towards the loan, or leasing the asset that is to be financed.
Some assets, such as trucks and business equipment, can be leased. But there are some assets which cannot be leased. If you can't find a way to share the risk of a loan with your bank, it's worth investigating the Government's microfinance scheme. Under this scheme, businesses and sole traders who have been refused credit by banks can get loans of up to €25,000.
"The microfinance scheme can sometimes help to get the risk shared -- and get the loan deal done," said Trethowan.
To apply for a loan under the scheme, contact your local county or city enterprise board, or visit www.enterpriseboards.ie.
HAVE YOU SECURITY?
"Once a loan gets past a certain amount, the bank will look for security," said Trethowan. "That could mean providing a letter of guarantee if you're running a limited company."
It could also involve providing company assets as security for the loan.
"Banks are looking for belt and braces these days," said Fielding. "You might have to give a personal guarantee, or agree to a fixed and floating charge over your business assets."
If you can't provide security for a business loan or are uncomfortable providing certain things as security, consider the Government's loan guarantee scheme for small businesses, which is due to kick in soon.
"Where there is no security available for a business loan, the loan guarantee scheme will give banks some comfort," said Trethowan.
BE CHOOSY IF YOU CAN
If you are lucky enough to have a choice of banks willing to lend you money, choose the cheapest bank -- and the cheapest type of finance available from it.
AIB charges 4.4 per cent interest on a range of business loans. These include its SME loan of up to €100,000, which is offered to people who set up their business less than three years ago; and its SME job creation loans of between €10,000 and €250,000. The job creation loans are only available to existing AIB business customers. AIB offers agricultural loans of between €10,000 and €250,000 for on-farm capital investment. The interest rate on these loans is also 4.4 per cent.
BoI charges 5.74 per cent interest on business loans of up to €300,000 as long as you provide security for the loan -- otherwise the interest rate is 6.74 per cent. If you've set up an overdraft facility with BoI, the interest rate charged to small and medium-sized businesses, and farmers, is 8.05 per cent.
Ulster Bank charges 8.45 per cent interest on loans for start-up businesses.
HAVE A MENTOR
Have a mentor when applying for a loan -- even if you're in business several years, advises Fielding.
"It's a good idea to show your bank that you have a sounding board outside your business -- someone with a good business background," he said.
A mentor can be useful if your bank is demanding what you feel is an unrealistic amount of security for a loan, as he or she can help you counter any unrealistic demands.
"You have to be prepared to stand up and fight your corner," said Fielding.
That fight -- as well as any homework you put in -- will be worth it if you get the money you need to get your business moving.