Wednesday 21 March 2018

Don't panic when faced with the banks that like to say 'no'

As the credit crunch shows no sign of abating, Louise McBride examines other financing available to businesses

With the eurozone looking dangerously close to imploding, the chances of the Irish economy recovering in mid-2013 -- as the Government hopes -- get slimmer by the day.

So, too, do the chances of our banks getting their act together. Businesses are unlikely to find the challenge of getting a bank loan get any easier anytime soon.

If your business is hitting its head off a brick wall in its bid to raise money from a bank, it could be high time you looked elsewhere. The Sunday Independent checked out four avenues that could be worth exploring.

Money for trucks and printing presses

YOU need to buy a truck, JCB or printing press for your business -- but your bank is turning up its nose at you.

You may be able to get a loan for this equipment from an asset finance company, such as the British bank, Close Brothers Commercial Finance. Such loans are usually taken out for five years, according to Adrian Madden, regional sales director with Close Brothers.

"The amount of money raised through asset finance can be anywhere from €10,000 to several million euro," said Madden.

"We provide loans for second-hand and new equipment. We see the equipment purchased as our security in a doomsday scenario. So if a business that borrows from us goes bust a year or two years into a loan, we would retrieve the asset as security.

"The interest rate often depends on how strong the business is -- and whether we're getting a 5 per cent deposit or a 20 per cent deposit off the borrower towards the purchase of the equipment," he added.

"It will also depend on how strong the security is for the loan. If you're borrowing money to buy a standard asset such as a truck, the interest rate will usually be cheaper than that charged on a specialised piece of equipment for example -- if your business can't repay the loan, it will be easier for us to repossess and sell on a truck than to do that with a specialised piece of equipment which might be bolted to a factory floor and so on."

Close Brothers also offers equity release loans, where you can raise finance for your business based on the value of certain assets owned by your company.

Money for bills

One of the biggest challenges for businesses today is to get paid for the goods and services sold to other companies.

"If you sell something to a business tomorrow, you could be between 60 and 90 days waiting to get paid," said Paul Stephens, head of sales for Ireland with Close Brothers.

With invoice finance, a bank or commercial finance company offers you a loan on the strength of the money owed to you by companies you have invoiced. With this type of finance, you can generally access between 80 and 90 per cent of the money owed to you within a few days -- instead of waiting up to three months or more to get paid.

AIB, Bank of Ireland and Ulster Bank offer invoice finance, as do companies such as Close Brothers and Bibby Financial Services.

Not all sales qualify for invoice finance, however. With AIB for example, you usually can't arrange invoice finance for cash sales, sales to individuals, or sales of goods delivered under a contract.

To arrange invoice finance, you must usually provide your bank or invoice finance company with a copy of the invoices you've sent to a company. As long as those invoices qualify for finance, between 80 and 90 per cent of the value of those invoices will usually be immediately released to you. You then chase up payment of those invoices as normal. (If arranging your finance through Bibby Financial Services, Bibby will chase up the payment on your behalf.)

When your invoice is paid, the money received usually goes into an account -- which is used to repay the loan given to you by the invoice finance company. It then repays you the difference between what you borrowed from it and what you were paid for the invoice -- less fees.

The charges for invoice finance vary, depending on your business and the amount of finance being raised. You usually pay an administration fee or service charge to the bank or invoice finance company for processing your invoices. You will also usually pay interest on the money borrowed.

"Invoice finance is an expensive form of finance -- but it is often hard for businesses to raise alternative finance today," said Harry Slowey, co-founder of Finance One. "Ordinary bank finance is getting expensive, too."

Graham Byrne, director of Bibby Financial Services, said that invoice finance often works out cheaper than bank overdrafts.

Money for wheels

Whether you're a small business that needs two or three vans or a large manufacturer that has an army of sales representatives on the road, you might need to raise money to buy cars or vans.

If your business qualifies for an SME (small and medium-sized enterprise) loan with AIB, the interest rate charged is 4.4 per cent. Otherwise, your business will usually pay between 6 and 7 per cent interest for a loan, though "all business loan rates are negotiated on a case-by-case basis", according to a spokesman for AIB. Bank of Ireland charges between 5.49 and 6.74 per cent interest on business loans of €10,000, €30,000 or €50,000.

If you use a bank overdraft, you'll pay a lot more interest. AIB and Ulster Bank charge 8.45 per cent interest on business overdrafts while Bank of Ireland's business overdraft rate is 8.05 per cent.

It could work out cheaper to go through a car dealer's commercial finance arm or a fleet management company than through a bank.

Renault Finance charges between 4.9 and 9.9 per cent interest on its business hire purchase loans and leasing contracts.

Merrion Fleet Management, which specialises in leasing, charges 6.9 per cent interest on some of its leases. You will usually agree to lease a car for a set number of years and for a certain amount of mileage. "Your monthly repayments are based on the difference between the cost of the car and what the car is worth at the end of the agreed (lease) term," said David Wilkinson, sales director with Merrion Fleet Management.

"You are essentially funding the car's depreciation."

So how much would it cost to lease a car that costs about €30,000? The cost will vary depending on the car model -- as some cars depreciate more quickly than others. Let's say you're buying a €29,145 Ford Mondeo for a sales rep.

You could lease this car at an interest rate of 6.9 per cent from Merrion. Under that rate, the monthly repayments for the lease over three years work out at €528.43.

However, if you got a €30,000 business loan from AIB to buy the car, your repayments would work out at €936 a month over three years, based on an interest rate of 6.5 per cent. If you borrowed €30,000 from Bank of Ireland over three years, your monthly repayments would be between €905.40 and €922.24.

Of course, although car leasing can work out cheaper than the repayments on a car loan or hire purchase agreement, you will never own the car outright as you must hand it back to the leasing company after an agreed time. With bank loans, your business will own the car after it repays the bank loans.

Money for export

If your business exports a lot of goods overseas -- or imports goods from international companies, you may be finding it hard to raise the working capital you need to trade with overseas companies. With trade finance, you can raise anything from a few thousand euro to a few million euro for your business, according to a spokeswoman for Ulster Bank, which itself offers trade finance.

Bibby Financial Services also offers trade finance for Irish importers and exporters.

"We can provide importers with upfront funding against confirmed orders," said Byrne.

"We also offer export invoice finance, which works in the same way as invoice financing," he added.

Sunday Indo Business

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