Lack of Credit for SMEs ... or is there

whippet

I have been thinking about this for a while and hearing voices from all sides talk about the issue SMEs are having getting working capital and credit like over drafts.

I have been listening to anectadotal evidence over the last few months, from some people involved in SMEs who can't get credit for working capital from the banks or have their overdrafts severely curtailed. Of these companies I know that the owners had been using cash reserves and profits from the good times to finance and invest in modest to large property portfolios.

During the bubble times these guys were making more (on paper) from their property portfolios than their core businesses. There was little or no desire to build up cash reserves while the sun was shining.

Now that the bubble has well and truely burst they can not get working capital, their investments are not liquid at best and in many cases are work fractions of what they were. Banks at any time wouldn't be wise to offer credit to these type of businesses let alone during a global credit crunch and when they are severely under capitalised.

I aslo know of a few SMEs (including my employer) who had restructured their finances during the mid 00's to hoard cash reserves and now during tough trading times have access to credit where needed but crucially actually have working capital. Their cash reserves might be depleating with cost saving measures and leaner trading they are in a position to survive and grow when the market allows.

With all the haze of commentry being critical of the bank's historic recklessness and the demand that they now support the SME sector are we totally over looking the fact that many SMEs do not warrant credit and giving them credit would be akin to the stupid lending that went on during the bubble?

On a larger scale, think about Sean Quinn, using a profitable company's resources to leverage a massive investment that went pear shaped and ended up in an Examinership.

ei.sdraob

As a business owner who saved during the "boom" for a rainy day, and thankfully still being profitable as ever

my view might be biased and my experience might be anecdotal

but still to this day I have bank managers asking whether I want credit...

Considering quarter of our economy was directly involved in construction and most of the rest of the services sector relied on this, I am afraid that alot of businesses are simply not viable and will close one way or another, short of another property bubble starting, and thats the last thing this country needs!

I wouldn't blame the banks for not extending credit to some companies especially considering how many of the directors got involved or are tied in property "investments", alot of them, especially the ones started in later years simply didnt have a business plant

This recession is a painful readjustment that the economy needed, thats my way of looking at it, yes its causing pain but the gain was based on a bubble mentality not real business plans me thinks

SkepticOne

ei.sdraob wrote: »

I wouldn't blame the banks for not extending credit to some companies especially considering how many of the directors got involved or are tied in property "investments", alot of them, especially the ones started in later years simply didnt have a business plant

You wouldn't blame the banks for lending to businesses with no business plan?

Nijmegen

Credit is indeed very tight. The people I feel for the most are those in niche areas, and startups. You can forget about credit in those circumstances. But it's a circular argument - we need startups to get the economy going again.

The government could do worse than earmark a few billion in one of those banks we own to lend to SME's.

whippet

ei.sdraob wrote: »

This recession is a painful readjustment that the economy needed, thats my way of looking at it, yes its causing pain but the gain was based on a bubble mentality not real business plans me thinks

I would somewhat agree with this idea but I think it goes a little further.

I originally thought that the recession would in essence be a shake down of most industries and leave on the viable well footed businesses left, but what has happened is that many good businesses with historically good business plans have gone to the wall due to the decisions of owners and directors during the relatively short period of the bubble and using profits and cash to invest in outside interests.

One customer of ours who went to the wall was a market leader, day to day was profitable and had one of the best names in the business, but outside interests, external debts and lack of avaiable working capital cost 130 jobs, cut massive chunks out of out cash reserves and left people asking the question why?

The media said it was all to do with lack of credit and support from the banks, but anyone else who knew the back ground formed the opinion that the working capital and historic profits were ploughed in to a massive protfolio of commercial property that now is like a graveyard lining the M50.

So do to diversion from core interests a market leader is gone and has offered a lifeline to smaller less competant competition

Dirk Gently

whatever the reasons, there is a lack of money out there. We are owed a small fortune from lots of companies but getting paid is like getting blood out of a stone. In many cases, screws are being turned and smaller business are being made work for free in a lot of cases for bigger suppliers under threat of losing contracts. Its a catch 22, demand your money and get cut off or continue working for free or part payments. I know for a fact that a lot of it is opportunism and not necessity on behalf of the bigger companies. It all has a knock on effect. We deal with everyone from high profile companies who are in the news for wrong reasons, to small time companies or self employed one man shows. Some of the big time companies are grossly inefficient and carry on like thugs and gangsters to be quiet honest.

I find it's the state of the bigger companies which is in turn squeezing the little ones. It's very difficult to ring-fence those who are reckless and have a cut off point with those with good cash reserves. There are many businesses out there who were not reckless and did not speculate but are in difficulty because somewhere along the chain a reckless bully is turning the screw and people aren't getting paid even if they are still providing services as normal. Banks are also pretty ruthless turning off overdrafts too these days and of course the combination of not getting paid for work done and lack of cash available means things like paying rates on premises and guaranteeing wages etc is very difficult.

The web is so intertwined between creditors and suppliers it's difficult to look at an SME which isn't doing well and say in any certainty that it's due to their own bad management or reckless spending in the good times.

whippet

Nijmegen wrote: »

Credit is indeed very tight. The people I feel for the most are those in niche areas, and startups. You can forget about credit in those circumstances. But it's a circular argument - we need startups to get the economy going again.

The government could do worse than earmark a few billion in one of those banks we own to lend to SME's.

I think you may have missed the point I am trying to make. Banks make money by lending and to companies who can show they are valid and don't have 'other' debts hanging over them seem to be able to get credit.

The majority of talk and commentary I am hearing is about getting as much credit out to SMEs as possible ..... isn't that the sort of thinking that created the property bubble ... lend as much and as often as you can ?

Think about one sector for a moment, Car Dealerships. During the bubble years most small towns had more than one bright shiny new car dealer ships. There must be over 200 dealerships within 15 mins driver of blanchardstown.

Many of these are in financial trouble for many reasons:

- Industry on its knees
- historic debts (external and on shiny new showrooms)
- fierce competition - saturated market place
- Lack of credit.

Now do you reckon it would be wise for banks to be encouraged to offer credit to companies like the above?

Viable businesses who didn't become reckless during the bubble years will survice and come out the other side, those who are not viable will fall by the wayside ....

Hopefully those jobs lost by the reckless/un-viable companies will be recycled by the surviving companies who will eventually expand and grow with the economy.

But the notion being peddled by Industry leaders, Unions, Politician of all colours and the Media of buying jobs on credit is a very foolish move, in retrospect the majority of construction jobs in the 00's were bought on credit and where did that get us?

professore

clown bag wrote: »

Its a catch 22, demand your money and get cut off or continue working for free or part payments.

Here's a tip - Cut THEM off. If they don't pay spend some time looking for new customers who will. Or take a day off. Don't be wasting time and money (it COSTS money to work !!!) on a**holes like these. If they come crying back ask for all payments upfront. If they don't - well you have new customers who are hopefully better than the old ones !!!

professore

whippet wrote: »

I think you may have missed the point I am trying to make. Banks make money by lending and to companies who can show they are valid and don't have 'other' debts hanging over them seem to be able to get credit.

I think there are lots of viable SME's out there with cashflow problems due to the recession. However the banks in Ireland don't HAVE any money, they are all bankrupt. That is the crux of the issue.

ei.sdraob

SkepticOne wrote: »

You wouldn't blame the banks for lending to businesses with no business plan?

That's the thing, the banks were lending money to anyone who could breathe
those days are over


Yes they might be unfortunately overreacting and overcautious in some cases (there are always exceptions), but i am very very suspicious of some people moaning about lack of credit, often when you dig deeper you realise their business plan (if any) was based on directly or indirectly on the property bubble

whippet

professore wrote: »

Here's a tip - Cut THEM off. If they don't pay spend some time looking for new customers who will. Or take a day off. Don't be wasting time and money (it COSTS money to work !!!) on a**holes like these. If they come crying back ask for all payments upfront. If they don't - well you have new customers who are hopefully better than the old ones !!!

it would be nice if it was as simple as this.

We encountered a situation with a large customer who wasn't paying bills. We started to get tough, but eventually it turned out the customer didn't have the cashflow. We had many a debate as to what to do and the catch 22 was:

If we didn't supply, they couldn't operate .... no chance of getting paid.
If we did supply we were increasing the risk.

Eventually what we did was drip feed supplies on condition of getting paid a certain amount each week. This slipped and slipped and it proved even harder to get paid. We cut them off for a few weeks and they tried to buy from other suppliers who wouldn't offer credit.

Eventually they came good with some of the money but eventually went in the Administation and eventually liquidation. We got badly stung but fortuantly our cash reserved managed to soften the blow ... but it was such a difficult operational decision to make.

Dirk Gently

professore wrote: »

Here's a tip - Cut THEM off. If they don't pay spend some time looking for new customers who will. Or take a day off. Don't be wasting time and money (it COSTS money to work !!!) on a**holes like these. If they come crying back ask for all payments upfront. If they don't - well you have new customers who are hopefully better than the old ones !!!

We have on occasion but we have to pick our battles very carefully. It's not always as black and white as no pay, no service.

Finding new customers can be neigh on impossible when our market is a virtual monopoly between a few big fish who employ the same gangster tactics. A couple of giants can kill hundreds of smaller operators. Most frustrating thing is they're very much an inefficient bureaucracy. They do hold the contracts and with it the supply of work though which means they can be as inefficient as they like and make others pay.

Once someone has a power base, the utopian notion of competition is often exposed as a lie. The bigger companies can pretty much pay if and when they please, ignore contracts, stretch out payments so that you cant afford to walk away, shift goal posts etc. It becomes about consolidating power and keeping everyone else small, pretty much diluting the actual product or service. Contracts are worded in such a way that all necessary standards, training, equipment and safety issues are up to you and thats fine, if they didnt then use that as an excuse to use cowboy operators who dont comply but have no overheads due to not investing and continually meeting the tough regulations. It's just a legal loop hole to absolve the bigger company of liability while knowingly using the lowest substandard and dangerous operators they can find. It damages the service and penalises those who try to be professional in their work. You pay for inefficiencies on their side. Some people might **** about stuff like this and think its great cost control but in my view its corrupt and the SME who does the donkey work and the paying customer who receives the service are the ones who suffer. It's not so much survival of the fittest, but survival of the monopolies and the cowboys who support them.

The only way around it is to spread your customer base as wide as possible, but again, finding customers in a very narrow cartel can be difficult.

Godge

I have been talking to quite a number of people I know involved in small business, both new and old.

Old with strong business plans and no overhanging involvement in property debt are getting credit.

even some new businesses setting up with cheap leases and experienced people but no overhanging personal debt are getting credit.

However, there is a large group of businesses out there who either foolishly invested in geared property deals or got tied to unsustainable leases or are involved in sectors such as construction. These businesses are not getting credit and no sane bank would give them credit. If they can trade their way out of their problems in the next year or two, they will get credit but otherwise.............................

Mark_F

Hi All
What about the guys who had a business, but lost it during the recession? Maybe because of bad debts with customers, maybe from property investments, or a whole lot of other reasons.
No bank will lend them any money.
these guys actually have the experience and the know how to set up and run companies
It is the small businesses that will get Ireland going again.
I am in the above situation

I got a contract abroad for the supply of our products. Deal size was €500,000 with €200,000 profit. My customer would only pay by confirmed Letter of Credit on an FOB (Free on Board) basis. I asked the bank last friday for facilities and I had to call the bank this morning, no one called me back, as I had to let the customer know today whether I would do the job or not. I was told NO. I have had to walk away from the deal. Now that 200k profit would have changed my business totally. Would have created at least 5 jobs immed and lead to further work.

How do you coup with that.........
That is not the first contract I have walked away from due to lack of finance.
Anyone any ideas

johnnyskeleton

Mark_F wrote: »

Hi All
What about the guys who had a business, but lost it during the recession? Maybe because of bad debts with customers, maybe from property investments, or a whole lot of other reasons.
No bank will lend them any money.
these guys actually have the experience and the know how to set up and run companies
It is the small businesses that will get Ireland going again.
I am in the above situation

I feel a great deal of sympathy for those people - especially the ones stiffed by non paying customers. However, the banks take a once bitten twice shy perspective on it and when deciding to go for the new market entrant with a good credit history or the exising one with a bad credit history they will choose the former. I suppose it means that new people get to have a shot at the title.

I got a contract abroad for the supply of our products. Deal size was €500,000 with €200,000 profit. My customer would only pay by confirmed Letter of Credit on an FOB (Free on Board) basis. I asked the bank last friday for facilities and I had to call the bank this morning, no one called me back, as I had to let the customer know today whether I would do the job or not. I was told NO. I have had to walk away from the deal. Now that 200k profit would have changed my business totally. Would have created at least 5 jobs immed and lead to further work.

How do you coup with that.........
That is not the first contract I have walked away from due to lack of finance.
Anyone any ideas

Could you ask the purchaser for an upfront payment? Considering that you have been burned by bad debtors in the past getting some of the funds upfront as a deposit (say 100k) makes sense. The customer wants to make sure that they dont get burned as well, so maybe you could work out a piecemeal arrangment ime. 50k deliveries payment on delivery?

Have you contacted other banks to see if they want your business?

Have you tried crowd sourcing / kickstarters?

You could also seek out some venture capitalists or even go on dragons den.

Finally, if you are exporting a product, contact the IDA immediately. They might be willing to back you.

Best of luck.

Mark_F

HI Shine your shoes.
Many Thanks for the post.
Customer is a PLC and their policy is LC only. They will not do a down payment either...
Not possible to do piecemeal as it is one order\consignment.
VC will take to long.
Dragons den will take too long.
Other banks do not want to know as I have no trading history with them.
God it is hateful to be able to go out and secure orders, then to have the door slammed in your face.
Attitudes need to change in this country.
"Best little country in the world to do business" My Arse Mr Kenny... apologies, just a very frustrated guy trying to do the best for himself and his family......

I shall keep going though, there has to be a break through eventually.....

Mark_F

breaking news update.
I cannot believe my luck...... there surely is a god out there.
I did not contact the customer to walk away from the deal. I could not do it. I have been wrecking my head all day about this.
€200,000 in profit foregone is a lot for any small business.
I got a private message from a totally unknown to me trade finance provider for me to contact them.
Well of course I did. Gave them the details of the deal.
They have approved the deal. In principle, just now need to clear it all past my customer.
They will take the LC and they will invoice the customer. so they pay for all my cash requirements, raw materials, labour etc. they will invoice the customer, and collect the money. Then I get my profits less there fees.
this kind of thing gives a person the confidence to go out and hunt for good profitable business
Now that is what I call a commercial approach by a funder
I have struggled for 4 years, and was told forget ever getting money from the banks again.

#feelingbrill

newacc2015

Look at how Germany. It has a glut of cheap savings in Banks, which banks dont know what to do with. Savers are penalised with minimal rates eg like 0.01% is common in some banks. Some German firms sell bonds to their employees. Their employees know the Business, they are working for is pretty stable and are keen for it to succeed. They benefit from getting a return on bonds, better than what their bank offers. The Business benefits from credit, possible cheaper than a bank and easier to get than a bank.

People need to stop moaning about the banks. We have a dysfunctional banking system and will have for the next few years anyway. People should look at alternative places for finance

Mark_F

You are dead right newass2015.

I was approached by this funder, after my post on here. I had never thought of what they could do for my business. I never even knew that kind of solution existed. I had asked my accountant and he said VC, I must say I am disapointed by the lack of lateral thinking from my accountant. And he frowns at you once he gives you an invoice, until it is paid.

I was within 30 mins of walking away from the deal with my customer. Now I have signed the contract, ordered the raw materials, given my sub contractors the order, they have got a cash backed payment guarantee from my funder, my customer has issued the LC to my funder, so I have NO cashflow issues with this deal. In actual fact, they told me to go out and get another one like it straight away. Now that is what I call a solid platform from which to grow a business

As a small business, and someone who came through a rough patch (show me who has not), I was letting the banks decide my future. I needed them to say yes and if they did not, I was never gonna rise from the the bottom. Well Feck that. No idiot of a banker is going to decide whether I am a success or not. They are not Entrepenures, they claim to be, but they have NO idea how a business works.

This situation had untold impact on my family, relationship with my wife, family (who had been telling me to just go and get a job).

SO for anyone who was in the same position as I was. Never take no from an idiot banker as deciding your destiny in life. Think about it. There are funders out there.

I was told at the meeting ytday, the only reason they will not back a deal is if the buyer is not good for the money.

#vhappyfri