Last week, Minister for Finance Paschal Donohoe confirmed that Ireland’s economy is in a deep global recession due to the Covid-19 pandemic. As always, cash is king for any business to survive in choppy economic waters: either your business’s own cash reserves, or access to working-capital bank finance, including overdrafts, stocking loans or debtor finance.
Over the past few years, banks have cited the high levels of cash deposits being held by SMEs as one of the main causes of low demand for new loans from SMEs, and for the low utilisation of agreed overdraft facilities. Now, over six weeks into Ireland’s lockdown, it is likely that any slack from SMEs’ reserves or previously under-utilised overdraft facilities are coming under pressure. Cashflow management through the rest of 2020 is now of the utmost importance.
Businesses face two challenges to the cashflow on which their survival depends: the net impact of the immediate loss of business cashflows in the lockdown and the required working capital to get the business back up and running, after the gradual return to normality resumes – it may take some time to return to full normality.
Our banks are keen to assist viable businesses and farms through this emergency. The banks’ own lending reserves are supported by special government initiatives including additional SBCI loans being made through the banking system. For microbusinesses, there are increased levels of Microfinance Ireland loans available.
Government SBCI loan supports for businesses may be regarded as a water tank, with the banks being the taps by which the supports will flow out to individual firms – based on their assessed viability. While the government will guarantee 80 per cent of the lending risk for SBCI loans, the remaining 20 per cent risk will fall on each bank.
Viability – or ability to repay – will be a key word for businesses and farms to get bank support. Viability, however, involves predicting the future of the business, which is unknown – it is a matter of judgement based on available information on each business.
Each of our banks is different. They all have different appetites for lending risk, and different views on how to interact with borrowers. Each will have their own views on what viable means, and in their response to how they support businesses through this emergency.
But it is likely that businesses seeking support from banks, will fall into three categories.
First are businesses which already have a satisfactory borrowing record with their bank. It is likely that these businesses will be able to access the support they need without much difficulty.
The following categories will be more challenging in terms of convincing banks of the viability of the business and its ability to repay any new lending.
The first of these more challenging groups involves businesses which have a ‘blemished’ relationship with their bank. Bounced cheques and unpaid direct debits, late or missed repayments on existing or previous loans – all are recorded by banks and may be reported to credit registers and bureaus.
The second includes businesses which have never needed to borrow before – only 20 per cent of SMEs currently borrow.
It is likely that your bank will know little or nothing about your business, other than what is in your statements.
Banks will expect that you have a good feel for all aspects of your finances. And if you don’t know where you are now, and what your plan for the future looks like, the bank will simply say no to your request for a loan.
If you were asked to tell the story of your business viability in a compelling way, could you do this, supported by the following?
1. Trading records. Banks will first look at your recent past trading history, and your financial accounts for the past three years will be analysed. If your last financial accounts are more than a year old, they may not be adequate to show the recent performance of your business. If you can’t have audited accounts, can you get draft accounts compiled for the last financial year? And can you explain what is happening in the business, and what drives the numbers on these accounts?
2. Management accounts, showing recent financial performance up to February 2020 – to bridge the gap between historic accounts and latest trading.
3. Revenue projections. Can you credibly forecast sales levels, or produce contracts on which income will flow after the lockdown?
4. Cashflow projections. Do you have credible cashflows forecasted for restarting your business from a standing start again – and what is the maximum lending support you require to get the business through to ‘normal’ trading?
Viability will be determined in sufficient cash being generated to meet all your liabilities as they fall due, including the repayments on the proposed loan.
If you believe you have a viable loan request, and have been declined by your bank, visit creditreview.ie. We always do our best to help viable SMEs and farms get the credit they deserve. Credit Review charges a small fee ranging from a minimum of €100 to a maximum of €250 depending on the value of the loan under review