If you are an SME owner looking for a short or medium-term loan, whether it's for working capital or for expansion purposes, you are probably well aware that the pillar banks are no longer the only game in town.
Granted, the top three banks still dominate the market, but it's saying something that the value of Ireland's SME loan book is still hovering at less than €16 billion, a far cry from the €45 billion peak achieved in 2008.
This, together with a refusal rate of around 30 per cent, an average waiting time of two weeks for decisions on applications (according to Isme's latest Bank Watch survey), and it's no surprise to learn that non-bank lenders are getting more of a foothold in this market.
Such lenders include Finance Ireland, Bibby Financial Services, Grid Finance and Fexco Asset Finance, but also peer-to-peer platforms such as Linked Finance and Flender.
Derek Butler, chief executive of Grid Finance, recently told The Sunday Business Post that raising awareness is a key issue for non-bank lenders. "The non-bank finance industry is the primary source of finance to SMEs in the US, and Europe will inevitably follow this trend, but it will take time for the industry to fulfil its true potential," he said.
Furthermore, there are credit options available through both bank and non-bank lenders that are backed by the government's Strategic Banking Corporation of Ireland (SBCI) initiative, as well as microfinance loans through your Local Enterprise Office.
So whether you are a micro enterprise, an SME or a small mid-cap operation, there are many more alternative - and credible - sources of credit than you think.
Online P2P lending platforms, also known as crowdfunding, use the power of the crowd to connect small businesses in need of funding with potential lenders (both private and institutional investors) typically looking for profits.
The platforms themselves do not invest their own funds and don't provide protection for lenders; they act as intermediaries and provide additional services such as risk assessment, payment transfers and portfolio management in exchange for a fee.
Online P2P lending is already big business in Britain and US. The sector has only been up and running here since 2013, with the establishment of Linked Finance, and while there are no official statistics, sources in the industry suggest it could account for between 2 and 4 per cent of all SME lending (excluding property-related transactions).
There are two main P2P online platforms for general business loans. The aforementioned Linked Finance is said to account for more than 90 per cent of the market, probably because of first-mover advantage, while Flender has been broadening its investor base.
LInked Finance offers unsecured loans from €5,000 to €300,000 at rates ranging from 6 to 17.5 per cent. Chief executive Niall Dorrian said that, to date, the firm has extended around 2,500 business loans worth over €115 million across all sectors of the economy.
In their earliest days, P2P platforms may have been perceived as a lender of last resort but that's no longer the case, says Dorrian, with average loan sizes up significantly and bigger businesses now knocking on the door looking for up to €300,000. "I think the pertinent point there is the unsecured piece, and that's really what differentiates us from the bank bar our selling points, which are really speed and simplicity," he said.
Linked Finance has a similar risk appetite to the banks, he says, but while the banks may change their attitude from one month to the next, "our risk appetite is probably much more consistent".
It's P2P rival, Flender, offers loans of between €10,000 and €250,000 over terms up to three years with rates averaging in and around 10 per cent, judging by the case studies on its website. Founded in 2015, chief executive Kristjan Koik says the firm grew its volume of loans by over 500 per cent in 2018 to €6 million and is on track to do the same again this year.
But with that growth, more of the loans available are being provided by institutional investors rather than individuals. "As a loan books grow, that percentage of the small lenders just gets smaller and smaller because institutional finance is now making up the majority of lending," Koik said.
Grid Finance used to operate in the P2P space, facilitating investments of up to €100,000 from small investors, and was second only to Linked Finance, but earlier this year it opted to step away from the market because of what it said was a lack of regulation of the crowd-funding sector.
Its main product now is a cash advance facility aimed at businesses with revenues from credit or debit card sales. They can borrow up to €100,000 over periods ranging from three to 18 months, and repayments are directly linked to their merchant services receipts.
Rather than apply interest, the cost of this facility is based on a fixed fee of €6 per €100 (excluding VAT), and a 'capital provider' fee that depends on the size and term of the loan but starts at €4.50 per €100. So, for example, a loan of €20,000 paid over six months would cost €3,000 (excluding Vat on the fixed fee).
The state agency
Besides the above, other big non-bank lenders include Finance Ireland, Fexco Asset Finance and Bibby Financial Services. They lend to SMEs and businesses too, but focus specifically on products like asset, invoice or trade finance.
Some of this lending is supported by the Strategic Banking Corporation of Ireland, a state agency which aims to provide flexible and easier-to-access SME funding here through low-cost finance and risk-sharing schemes, and to support competition in the SME lending market.
Established in 2015 and supported by the European Investment Bank and the NTMA among others, the SBCI has to date lent over €1 billion to SMEs and agri-businesses. The advantages of these loans include more payment flexibility, lower interest rates and longer repayment terms (up to ten years in some cases).
So while the pillar banks may be getting some stick for their low-risk appetite and bureaucratic application processes, they are also among the 'on-lenders' for SBCI loans.
As an example, take an SME with a small manufacturing facility that needs to upgrade a key piece of machinery and needs a €400,000 loan which they can repay over five years. If the bank might charges a 6.5 per cent interest rate for a loan of this sum, the cost of credit would amount to nearly €70,000, while an asset leasing firm might charge 7.5 per cent which would set the firm back over €80,000 (and it wouldn't even own the asset). An SBCI loan, however, could be provided for a 5 per cent interest rate over the same five-year period, meaning the cost of credit would be nearly €53,000.
It's also worth noting that both Linked Finance and Flender may be joining the ranks of SBCI non-bank on-lenders.
Credit Guarantee Scheme
If you find yourself being rejected for a loan under normal lending criteria, such as inadequate collateral or with a business idea that is perceived to be high risk, the SBCI also operates the Credit Guarantee Scheme (CGS). The idea is that the Irish government provides the lender with an 80 per cent guarantee for which the borrower pays a premium of up to 2 per cent.
Up until recently, the scheme was only available to businesses applying for new loans. It’s now also available to companies which want to move loans from a bank that is leaving the Irish market. The maximum length of the guarantee has also been extended from three to seven years.
If an application to the CGS fails, you can appeal, either through the participating lender or to the Credit Review Office, who may conduct an independent review of the decision. You can also apply for a review if your existing credit terms have been changed.
If you are a small firm with fewer than ten employees and an annual turnover of up to €2 million, you can apply for unsecured business loans of between €2,000 and €25,000 for a range of purposes from the government's Microfinance Ireland loan fund. Available from Local Enterprise Offices, Local Development Companies and banks, but also directly from not-for-profit lender Microfinance Ireland, repayment terms can be up to five years.