The Minister for Finance recently called for suggestions from members of the public on what can be done to encourage viable businesses to seek credit.
A total of well over 100 suggestions were put forward to the mailbox. A broad interpretation of the remit of the initiative was adopted to ensure that anything which was submitted and could assist the flow of credit was carefully considered.
A limited number of these suggestions have been selected for further investigation, development and implementation. These were selected on the basis of either being the most frequently made suggestions, appearing to be the most relevant to the issue of getting viable businesses to seek credit and the suggestions which the stakeholders considered most significant. There may be regulatory or other reasons why these cannot be implemented which have not been examined yet.
These were received in the firstname.lastname@example.org mailbox in response to the Minister’s call. At the request of the stakeholders group, they are categorised as follows:
- Building trust and approachability
- Ease and consistency of applications
- Cost and Conditions of credit
- Consequences of refusal of application
- Creating alternatives
On foot of this selection process, the Department is now opening the initiative to a further round of public consultation. Specifically people are invited to comment on the list of suggestions with a view to improving them. Any comments should be sent to the email@example.com mailbox before 31 July.
During this consultation process, the Department of Finance will be following up the suggestions on the list with the appropriate organisations to assess their feasibility. It is accepted that some may not be found to be workable after detailed examination. That is one aspect of such a wide range of contributors but in no way diminishes the contributions made.Education
1. “MABS” type of organization should be available to businesses. It could be populated by professionals (accountants, solicitors) currently out of work and some experts from major accountancy bodies.
2. Design and implement a web site which would provide advice on the preparation of cash flow projections.
3. Develop a comprehensive ‘Back to Basics’ Programme of business education and training across Ireland that each of the four Key Players (banks, Government, businesses and business advisors/accountants) commits to fully introduce to their own constituent members, with the result that there will be a significant improvement in the likelihood of viable businesses getting the support that they need and deserve.
4. There is a need to clarify what is meant by a viable business. Banks are saying that businesses are not viable when they would be viable if they could get credit.
5. Set up another office similar to the Credit Review Office. Market its role as a Commercial Credit Intermediary who would put together a credit application on behalf of a business free of charge. Provide assurances of client confidentiality and second a number of experienced commercial bankers from all the banks to it.
6. Approaches to the banks at the moment are fraught with difficulty, not least because there are no clear guidelines on whether finance is actually available, no clear guideline on what criteria banks are applying in their assessments of applications, no clear guidelines on what type of funding applications will be considered eligible for funding (e.g. cars, specialist equipment) and no clearly defined criteria for the applications. And most companies are reluctant to apply and risk a refusal of credit on their records – this reluctance might be overcome if they had a clearer idea on eligibility and availability.Building trust and approachability
1. SME’s do not know who is dealing with their accounts in the larger branches. There needs to be dedicated staff appointed to the SME accounts held in each branch in order to build trust between business and bank.
2. The advancement of credit for SME's needs to be given back to bank branch level. At the moment the local Bank Manager cannot make a decision on anything, it has to go up the line to Head Office where the person dealing with the application has no knowledge of or feel for the applicant or the relevant business.
3. Many businesses are reluctant to approach their banks for additional credit because of the practice of banks of revisiting all existing credit arrangements as a quid pro quo for the granting of the additional credit. If the existing business is viable and creditworthy, the banks need to send out a message that existing arrangements will not be touched.
4. Banks should have representatives at shopping centres advising business owners on how they can apply for credit.
5. Banks should have a presence at Marts and Macra Na Feirme meetings so that farmers can approach them in a relaxed environment.
6. Banks should open at the weekends to allow business customers get to the bank when their own business is closed.
7. Business representative organisations should intermediate between the banks and their members.Ease and consistency of applications
1. There should be a single application form common to all banks for businesses seeking credit. This would significantly reduce administrative and accountancy costs for businesses who want to seek credit from more than one bank in order to compare prices and conditions.
2. Set up a mobile phone app with the information required to make an application for business credit.Cost and Conditions of credit
1. Clear information on the price of credit to SMEs should be published so businesses can compare the different banks offerings. This should include all charges which are associated with the credit application including legal fees.
2. The costs of providing security should be reduced as much as possible.
3. Banks should accept solicitor’s undertakings in relation to SME credit in order to reduce legal costs associated with credit.
4. Grant interest free credit for new businesses for a period of two years, allowing them to get a foothold in their line of business.
5. SMEs should be able to reduce their capital repayments and hold the terms of their loan. This would permit them to re-invest and increase their working capital.
6. Have the Credit Review Office as a free service.Consequences of refusal of application
1. If an underwriter refuses a loan to a business it makes it much more difficult to get approved for credit in the future as there is a “negative mark” against the applicant. The underwriter should be obliged to outline the reasons why they decided to refuse the application, thereby making it easier for the business to address the problems outlined and re-apply for another loan. There should be no “negative mark” against a business if it reapplies for credit.Creating alternatives
1. A number of SMEs are unable to obtain suitable funding for working capital because they have no unencumbered assets to offer the bank as security or the security available is not sufficient to cover the facilities sought. If these companies obtained trade credit insurance these policies could be offered to the banks as added protection to the facilities they seek. The policy would be assigned to the bank and any claims that occur would be paid to the bank, thus relieving the policyholder of obligations to repay the facility.
2. Create a website to bring private lenders (such as individuals) and businesses seeking finance, together. The benefit of such a scheme is that the lender achieves a better rate than they would achieve if the funds were put on deposit, the borrower typically gets a lower interest rate, and the flow of finance is in the hands of the free market.
3. Credit unions should be encouraged to work with County Enterprise Boards to facilitate credit to businesses. The credit union could look at a credit proposal and refer it to the CEB if it looks like it could be a practical proposal with extra assistance, particularly in marketing and financial areas. CEB could mentor the business in these areas and other areas if necessary and develop the credit proposal to a stage where it would be acceptable to the credit union.
4. Viable businesses should be permitted to convert debt to equity. This would ease the pressure of paying interest and repaying capital and allow time for viable businesses to turn around.
5. One possible way of giving the banks some collateral to underpin SME loans would be to allow any contributions made by business owners to their own pension schemes through AVCs or other pension investments to be assigned as collateral for the extension of facilities. Alternatively, they could be cashed in for loan repayment or investment purposes. Facilitating these pension investments to be used as collateral for a loan to a company that an individual has an interest in would assist the company to continue trading and access capital, while simultaneously providing the lending institution with collateral against the drawdown.
6. Provide opportunities for private individuals to invest directly in micro and small businesses with a state guarantee.
The Stakeholders group consisted ofAllied Irish BankBank of IrelandChambers IrelandCity and County Enterprise BoardsCredit Review OfficeDepartment of FinanceDepartment of Jobs, Enterprise and InnovationICMSAISMESmall Firms Association