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With improvements in the economy, funding gaps in the banking system are being filled with asymmetric money sources

October 25, 2017

 

The past ten years have been bleak for SME promoters looking for funding. We were all used to a glut of cheap credit being thrown around by banks like confetti at a wedding. Lending for SMEs evolved from the bank manager’s golf club friends and pillars of the community to more democratic arrangements, where so long as borrowers had property to secure them, loan cheques were being written to all and sundry.

 

No heed was paid to company balance sheets, cash flow projections or the industry sector in which the business was operating, and the tale of the banking sector’s exposure to this type of borrowing does not need to be told again here. Since the banks shut up shop in 2007 the lending environment has been desolate.

 

Luckily however, nature abhors a vacuum and sources of asymmetric funding that are accessible to SMEs are now emerging. Initially they started offering money to developers using the Anglo model, which was essentially a profit share. While development project promoters grumbled about the cost of these funds (at 12% annually) the reality is these funds were appropriately priced to reflect the risk inherent in the projects being funded at the time. Indeed, the shock with which borrowers view those operating in this loan space goes to show how spoiled they were in the previous lending environment.

 

With the property market having settled down, and greater certainty regarding costs, likely sales prices and the availability of funding for purchasers emerging, these rates are now coming down to reflect the new risk profile of these development projects.

 

The continuing reluctance of the pillar banks to lend to developers arising from their legacy aversion to risk and impossible lending conditions, together with borrowers’ scepticism looking past the bank’s fluffy advertising campaigns means they are now very secondary targets for developers and companies seeking funding to expand and grow.

 

The myriad of asymmetric lenders offering everything from crowd funding, kick starting, car finance, invoice discounting, equipment leasing, micro business funding, women in business funding and mentoring, state aid for marketing, training, through Local Enterprise  offices, Enterprise Ireland etc., all mean less reliance on banks as sources of financing.

 

In addition to this we have seen the improvement of company balance sheets that has resulted for the first time in resources now being available to companies looking to take advantage of less onerous trading conditions to expand by way of acquisition, or merger, or to properly and adequately capitalise their businesses.

 

The point is this; look past the traditional and to the new in terms of sources of funding for your company expansion.

 

Barry Lyons is a commercial solicitor with over 20 years’ experience advising SME promoters. He can be contacted at 01 539 0060 or blyons@lyonssolicitors.ie

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