Friday 20 April 2018

SME funding: where to find the money

There are an increasing number of ways for SMEs to fund their business, but plenty of challenges too. Gavin McLoughlin discusses the sector with a series of SME lenders

Gavin McLoughlin

Gavin McLoughlin

How do you solve a problem like funding your business?

There are a lot more answers today than there were five years ago.

To illuminate the subject, a varied crew of SME lenders are gathered in a room in Dublin's IFSC. They meet as part of the preparations for a Fund SME expo to be held in Dublin next Thursday, where SMEs will get a chance to meet commercial funders.

Ronan Horgan, managing director of newly incarnated Capitalflow Commercial Finance is here. His company is mainly focused on asset finance in the area of leasing, hire purchase, and asset refinancing. Often in these discussions, non-bank lenders are referred to as 'alternative' lenders. Horgan, who spent 20 years working in Bank of Scotland, makes it clear that he doesn't like that.

"This whole 'alternative finance' bit for me is like the alternative medicine... it sounds like it's weird and wonderful, and really I think it's up to the independent finance providers to start talking maybe slightly differently," Horgan says.

"Because the business owner at the other end, when he hears 'alternative', he's thinking 'weird, wonderful and whacky'. What we do is provide facilities, very simple facilities."

In the aftermath of the banking crash, an opportunity has emerged for entrepreneurs to try and steal what has traditionally been the banks' lunch. Derek Butler, chief executive of peer-to-peer lender Grid Finance, is trying to do just that.

"A lot of private-sector entrepreneurs are seeing the opportunity to deliver niche products in a very new way," Butler says.

"What's traditionally been delivered through the banks is a very standard suite of products, a lot of the non-bank funders are really serving a very acute part of the market that's either been underserved or not served at all sits alongside traditional bank finance and collectively we provide a good capital base in small businesses."

Olaf Fitzsimmons, Ulster Bank's head of SME banking for the Eastern region of Ireland, says this country has thus far been undeveloped when it comes to non-bank finance.

"If you look at other European countries, or the US, non-bank funders play a greater part alongside commercial banks. So clearly there's been a shrinking of the banking market in Ireland in terms of the number of players. It's down to kind of three main players at this stage, from seven or eight previously - so clearly there's an opportunity in the market.

"I think we're also seeing that people have been dusting themselves down after the recession, and people who maybe have been in paid employment previously have changed careers, having had to look at something new, maybe having started their own business. So I think there's more opportunity.

"Ireland had a very competitive banking market in prior years, with a large number of providers. So there was probably less of an opportunity for it to develop and anyway, needs were being met through that way...

"Nowadays it's about finding the best fit - in terms of what's a good fit for senior debt, and what's a good fit for all the other forms of senior capital. Many businesses took an almighty battering during the bust and those that survived are in many cases still working through legacy issues," adds Fitzsimmons.

In the course of his work, Michael McLoughlin, chief executive of Amarach Research, has found that confidence is one of the biggest obstacles to SMEs taking in external finance.

"Everyone wants to grow their business, but they're not yet confident enough to seek out alternative sources of funding. They would rather grow from within their own resources. At the moment, they don't have the confidence to borrow."

Fitzsimmons says sentiment is starting to tick upwards, however. "I think the confidence point is interesting, because certainly in the last couple of months we've seen increased confidence. It mightn't be fully manifesting itself in terms of borrowing at this stage, but certainly SMEs have come through a number of years where they've had more stability, they've achieved their plans, they've gone beyond the loss-making stage in a lot of cases, and are now repairing their balance sheets.

"We've noticed, since the start of this year, an increased confidence - and in a lot of cases, a need for investment in terms of the business has grown. They need additional capacity, bigger premises, there are some small-scale acquisitions happening. And there's also pent-up succession planning... people who wanted to exit the business three or four years ago but couldn't, in terms of where the business and the economy were at, that's now coming to the fore at the moment."

Grainne Lennon, operations manager of cross-border trade body Intertrade Ireland's equity network, which seeks to help SMEs raise money, says that Intertrade research indicates a lot of people are still very unaware of some of the new crowdfunding platforms, or peer-to-peer lending.

"There's still an ignorance there, a lack of educational awareness about how those type of funding options can help companies grow," she said.

Mark Flood, a co-founder and director of SME-focused private equity firm Renatus Capital Partners, has found that in many cases, small business owners are unwilling to dilute their stakes in exchange for cash.

Flood says he recently encountered two businessmen who lost out on a deal because, despite having an equity deal agreed, they spent too long shopping around for high-interest debt.

"Their head wasn't in partnership and equity to make it happen. It was in: 'what rate is your money?' And it is important. If you're procuring anything, you've got to get the best value - but a lot of people get stuck on the rate and they lose sight of the bigger picture," says Flood.

"It's an Irish thing, it's there in the Bull McCabe from The Field - it's very deeply ingrained. It's just: 'Equity, don't give it away'."

Many of the non-bank products on offer will cost more in terms of interest than your run of the mill bank loan. So is price all that matters, or are other things important too?

Michael McLoughlin says feedback he gets from SMEs indicates that the amount of time it takes to get the finance is extremely important. Lending applications are "different to what they were before," he says.

"That may be a better thing in a banking perspective and economic perspective, but it does certainly take longer in most cases. SME owners are good at running their own businesses and probably good at managing cash flow - but the other detail of what needs to happen is very time-consuming, and there's a point at which the question arises: is it worth it? Do I want to go through all these hoops?"

"I don't think price is the only thing that matters, I think relationship matters. I think as well, the purpose for which they want the money is also important."

Derek Butler says that in his experience, SMEs aren't particularly sensitive to price. On his platform, the rate is set by people who log on to lend - with the average currently at 9.5pc, and the spread on that from 4.5pc up to 13.1pc depending on the risk profile of the business.

"For us, small businesses are not very price sensitive. The most important thing for them is access and experience. And to be able to access finance in a relatively seamless, speedy way, they're willing to pay a premium for that. I think there's much less sensitivity to the overall price of the funds.

"They want to be able to work with the people, access the funds quickly, and in a relatively straightforward way," adds Butler.

The price from banks looks likely to come down, according to Fitzsimmons. But he wants Ulster Bank to provide a broader service too.

"We've come through a kind of systemic event - in terms of where the market got to, and the nature of the market. But certainly we would find it now very competitive.

"We've about 15pc market share so there's 85pc of the market we don't bank, and we're anxious to address that and to grow the book sustainably," he says.

"There's an awful lot of focus on the price piece, and it seems to be the leading narrative often-times around the finance for SMEs. But I think research would bear out that actually there's other things they value more than that.," Fitzsimmons says.

"It has to be competitive, and I think the market is increasingly competitive.

"Naturally, risk appetite evolves - and it's a much more stable economy now than it was, unemployment is decreasing (albeit at a slower rate), so all the banks will naturally be more open to taking increasing risk against that backdrop.

"I think the important thing for us is the people and their capability, and what we've seen in recent years is that a great many SMEs have actually managed to grow in the last three or four years - and it's really encouraging to see a management team that has managed to steer the business through some really difficult years.

"A good commercial banker should be able to add a lot of value to an SME - and I think a lot of SMEs value that advice, the fact that somebody can give them a steer and say: 'Look, that doesn't feel quite right, your margin should be better', or 'your cash conversion should be better'. They are uncomfortable conversations - but the uncomfortable conversations can at times be the ones that are really important," concludes Fitzsimmons.

Risk is a factor too. Eugene O'Donovan, the chief executive of Kilkenny-based SME Finance and Leasing Solutions, which is focused on small-ticket leasing finance, says that many SMEs "dirtied their copybook" during the bust and now find it difficult to get a hearing from the banks, "whereas we're looking at their affordability as their bank statements reflect today, and are prepared to work with them then," he says.

The usual caveats apply to the sector, with the banking crash an all-too-vivid memory. Ronan Horgan says the minority government's potential for instability presents a risk to the sector. But there's another risk too.

"If we get into this over-lending space, just because somebody's looking for market share or somebody's chasing some other business, and we get into silly rates - then it's up to the banks and the financial institutions to make sure we don't get into that space," he says.

Derek Butler agrees.

"To add to the point about over-extending capital, I think that there's a risk of an interest rate impact - but I think the bigger risk for the sector more broadly is that when you end up in a scenario where there's a lot of bad debts because you've over-extended finance. In that case the entire sector gets damaged, because you've got a bunch of non-bank finance providers calling in debts.

"I think the second big risk, frankly, is awareness. There's an increasing number of independent finance providers coming into the market... and there's a massive job of work to increase the awareness of all of these providers so that the SMEs have an understanding of their choices."

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