Security for SME loan

EPjnr

Hi,

I have two businesses both relatively new. One is going into its 3rd year and I has been performing very well. I plan to double the size of the business this year and I am in the process of putting an application into the bank. My RM in Aib has told me that they will be looking for security to the value of 130% of the loan, is this the norm?

The company has stock and cash almost equal to the value of the loan but I am told this won't suffice as security.


Any advice much appreciated.

terryhobdell

The question of security for SME loans is going to be one of the big issues as the economy grows again. The banks only really lent against property assets and they are a no no now. They don't want your stock.They will give invoice discounting on your debtors which is fine and straightforward and could work. There is a programme run by Management Works which is part of Skillets. Which the Government is funding starting this month designed to train SMEs to deal with these issues http://www.managementworks.ie/business/building-financial-capability-smes
It seems like a model for what you need the first course is within two weeks send me a P.M.if you need. 130% cover is bull**** but the banks haven't a clue what to do at moment You will need to be better informed than them when negotiating. Good Luck.

Peterdalkey

Cash and stock are not considered tangible asset as security as they are ever changing and the stock may even be subject to retention of title by the supplier. They will of course take cash but it would need to be locked in, in their contyroal under a back to back arrangement, so not much joy there. If you have a good debtors ledger, they will take these debts under a specific charge, typically in a invoice discount scenario. However if you are in retail or do not extend credit, no use there.

Generally the only other alternative is personal guarantees from individuals with the substance to pay up in loan default or one of the microfinance schemes. It really depend on the size of your requitrement and you have not provided that information.

EPjnr

Hi,

Thank you for your reply.

Our accounts have proved that the business is viable and capable of repaying the loan. But they still want 130% security and take hold of all stock etc. Crazy!!

We are in retail so no debtors. So this is not an option.

I am looking at €200k loan plus €100k overdraft.

My father has collateral to the value of 130% of this loan but I refuse to ask him to do this, I would not give the bank the satisfaction.

I have a separate site worth approx 60k (still in my fathers name) and I am willing to give a personal guarantee although I do not have any assets apart from the two companies. This surely has to count as some sort of security? Along with 200k of stock.



I also read something about the Governments SME credit Guarantee scheme.
http://www.djei.ie/enterprise/smes/creditguarantee.htm

jimmii

This just seems ridiculous. Its as if they are making it next to impossible for you to get a loan which seems bizarre as on the face of it, it certainly seems like a good one for them to be making. I would try a few other banks see if they are more receptive.

Bandara

AIB are not in the business of loaning to smes, despite what their recent press releases claim

Imo BOI and UB are the only show in town

I got approved for funding recently via both of these, BOI wanted 75% cash guarantee (locked away for the term
Of the loan). Whereas UB only wanted 40% cash locked away for the term.

And I had no previous dealings of any sort with UB.

Ring them and try, I went via their main head office in college green. Don't waste your time in any branch

pedroeibar1

Despite what many say about ‘security’ all lenders look at repayment ability first and if that criterion is met they then, and only then, look at security.

You have not given us a huge amount of info, - nothing about existing borrowings, credit record, nothing concrete about what the new cash will be used for, one company is ‘going into its third year’, but you’ve said nothing about the other one. Are they linked? In the same sector? How new is the second one? How much of your time does the newer one take? Are you overstretching yourself? What support would you get from your suppliers? Have you considered the impact (upside/downside) of obtaining longer terms from them? What is happening on the street/centre where you are trading i.e. openings/closings? What is your competition like?
Retail is a very difficult sector at the moment, which is a deterrent. Perhaps the bank thinks you might push yourself into an overtrading position. You really need to prepare your case – regard it as going to war and wanting to win. I mean a proper presentation, cash-flows, the lot. Your object should be to make it impossible for them to say ‘no’ to your loan request or to ask you for more information. Give them positive stuff for the file, so even if it does go wrong, it will look good on paper. Why do you think the senior lenders in the banks are still in position? ....They had good CYA in place.

It would be well worth your while to get advice from your accountant or somebody who is used to dealing with bank lenders. With a professional proposal prepared you will be a lot more confident in meeting them and in the event of a refusal your ‘loan application pack’ will be ready to bring down the road to a competing bank!

terryhobdell

What pedroeibar1 says is of course true but assessing the ability to repay is something the banks have lost the ability to do. Even then they will want security cover and lend 70% of that so maybe this is where the 130% figure is coming from. There are other types of funding if you can pay good interest could you arrange a loan from family and friends? As an economy this issue will have to be sorted and with the SME problems forecast by Morgan Kelly I pity any business dealing with a bank.It is time to be very wily and think outside the box. Foreign banks may have different approach.

EPjnr

EPjnr wrote: »

Hi,

I have two businesses both relatively new. One is going into its 3rd year and I has been performing very well. I plan to double the size of the business this year and I am in the process of putting an application into the bank. My RM in Aib has told me that they will be looking for security to the value of 130% of the loan, is this the norm?

The company has stock and cash almost equal to the value of the loan but I am told this won't suffice as security.


Any advice much appreciated.

Yeah the way things work these days the bank needs to be sure if something goes wrong they will get 100% of their money back. Its not about reducing their risk its about them having zero risk whatsoever.
So if you can't guarantee the loan personally and you don't have an asset they can sell if you don't pay, chances are you won't get anything. Stock they would only value at a fraction of its selling price, your best bet is to ask them for the same amount as you have in cash in the bank, and freeze that money in the account as security. This of course could ruin your own cash-flow situation.

But the way you have to approach it is assume the bank aren't willing to take even the tiniest of risk on you. They will only lend if you give them a conclusive risk free proposal.

EPjnr

I just lodged my application with BOI yesterday and will now also consider Ulster Bank, Aib was my first stop as they have provided funding for my other company before (all fully repaid now) and that's who all my banking is with atm.

I have lodged the application offering just a site worth 60k-70k as security.
The business has borrowings from Directors circa 120k. No other debts.
The funding will be used solely to increase stock level to meet demand.
No connection between both companies. Two different sectors. Second company is only going into its second year.

Only 3 years in business, no credit history. No monies owed to anyone. Both directors good credit history.

I am not optimistic regarding the outcome of these applications but its worth a try I guess. I shall keep you posted. Any further advise is much appreciated.

Joe10000

I feel your pain....

Someday if I have the energy I will put up my whole story but I have just gone through this with my bank and it was exceptionally frustrating, the one piece of advice that sticks out from above is if you can avoid the branch network then do. I never thought this was possible but if it is then I recommend it. My experience of dealing with the people in the branch was not a good one, they are not fit for purpose.

The banks will look for anything they can to give them an excuse not to give you the loan. They dragged our application out for three months before giving the dreaded slow no. We showed more than adequate repayment capacity and offered our blue chip debtor book and a mortgage free property worth 7 times the value of the loan as security but the application was turned down because of a difficult period we went through a few years ago.

I have spoken to a number of people in business and I honestly believe the banks are putting as many road blocks in place as possible to prevent SMEs from accessing credit and if it was not for the credit review office they would be providing next to no credit.

antoinolachtnai

Could you get your suppliers to provide stock or a credit line?

pedronomix

" Confirming" Reverse factoring" and "supply chain financing" may well be options for you. Google any of the terms and you will find simple operational explanations.

pedroeibar1

pedronomix wrote: »

" Confirming" Reverse factoring" and "supply chain financing" may well be options for you. Google any of the terms and you will find simple operational explanations.

Yes, but all are not very feasible (access/cost/sector) options if Joe10000 is in retail and he does not have a bank on his side. Bizarrely Anglo had a very good trade finance dept. that was good at this stuff and which I understand was profitable but they closed it down a couple of years before their crash because it was less profitable than property lending!

In his position I would now try the Credit Review Office, ascertain the reasons behind the refusal, then work on redressing those issues before preparing for a reapplication elsewhere. If the ‘event’ he mentioned was not overly serious and happened a few years ago it should not be too much of a handicap. Do not spend too much time rattling on about asset values (debtors/property) as they are largely subjective figures in today’s climate. Also, I’d be careful about looking for extended credit from suppliers at this stage, it can be perceived as a sign of weakness and it could affect his credit lines henceforth, particularly with suppliers that are credit insured.