Tuesday 25 October 2016

Bank loan rules are 'choking enterprise in SMEs'

Published 15/10/2015 | 02:30

Head of the Credit Review Office John Trethowan
Head of the Credit Review Office John Trethowan

The almost universal requirement by banks for personal guarantees for SME loans is curtailing enterprise, the agency tasked with monitoring lending to small and medium enterprises has warned.

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Credit Review office chief John Trethowan also told the Irish Independent that businesses need to start paying closer attention to their credit scores because legacy issues from the crises can weigh on their ability to get credit.

The review office said negative credit ratings should not, in all cases, be a reason for declining credit.

The need to provide personal guarantees for business loans has long been a bugbear of small businesses.

In a submission to the Central Bank as part of the latter's review of the code of conduct for business lending to SMEs, the Credit Review Office said the issue of personal guarantees needs to be addressed.

"This is a major issue for SMEs and the almost universal requirement for SME credit facilities to be personally guaranteed is stymieing enterprise," the body stated.

Mr Trethowan said banks have returned to being cash-flow lenders, but with collateral.

"They always are looking for some form of backup, as well as ascertaining whether the business can repay the proposed loan," he said.

"If it's a limited company and there are no assets in the company, then they will go for a personal loan guarantee (PLG), or a letter of guarantee, from the promoter of the business if he or she has any assets just to back it up," he said.

"You have to look at each case as it comes along. We would be against just banks asking wholesale for security, but if it's part of a deal that's going to get the credit for the SME, then I would assume the promoter wouldn't be entering into a loan that they couldn't see there were to repaying as well. In some cases, it's fine."

Mr Trethowan also said businesses need to be aware of their credit rating.

"Our business community has been through hell. A lot of them have missed payments and have various defaults on the credit scores. It's very important that people have a good credit score and know what their credit rating is," he said.

"Right across Europe there is a lot of ignorance in businesses about their credit scores and their credit ratings and yet banks are using them all the time as part of the assessment process."

Mr Trethowan said the Central Bank is building a new credit ratings system which will be launched in the coming 12 months.

In its Central Bank submission, the Credit Review Office said negative credit ratings should not, in all cases, be a reason for declining credit.

"Many good entrepreneurs have impaired credit ratings due to the impact of the recession and if the issue that gave rise to the impaired credit rating has been addressed, this should be taken into account in the credit assessment process."

In its latest assessment report, published earlier in the year, the Credit Review Office said 2014 was the best year for loan sanctioning by AIB and Bank of Ireland since monitoring began in 2010.

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