TOP 1000/RAISING CREDIT:WHILE THE small and medium enterprise (SME) sector has been complaining loudly and bitterly about a lack of lending from the banks, times are tough for businesses of all sizes looking for credit.

While many leading Irish firms will have experienced credit squeezes and recessions in the past, they will never have encountered a situation where credit conditions changed so rapidly or dramatically.

From a position where the banks were almost chasing companies to lend them money, they are now apparently looking for reasons to refuse credit rather than extend it. The rules have changed radically. It’s no longer good enough to go into a bank and say that funds are needed for some unspecified ongoing expansion of the business or for vague working capital requirements.

Banks have become extremely averse to risk and are now looking for what in racing parlance could be termed “dead certs” when it comes to lending.

And this is quite possibly where the divergence of claims in relation to banking activity arises. On the one hand, employer organisations like the Irish Small and Medium Enterprises association

(Isme) claim that the majority of loan and credit requests are being turned down while, on the other, AIB and its fellow banks are saying that they are approving nine out of 10 such requests.

John White, president of the Institute of Certified Public Accountants in Ireland (CPA), offers one explanation for these contradictory assertions. “It’s going back to the conventional measurements of the health of a business and its ability to repay a loan,” he explains. “Sensitivity measurements and stress testing are being applied much more strictly and rigidly now than they were in the past. We advise clients to talk to their advisers and meet with the banks before putting in a formal request.”

This is the nub of the issue. These pre-request meetings are where the business is increasingly being done. “There is no point in going to the time and expense of preparing business plans and formal loan requests if the bank is going to say no anyway,” he points out. “So, when the banks say they are approving nine out of 10 loan requests, they are probably only referring to the ones that make it as far as a formal request.”

Deloitte corporate finance partner Michael Flynn agrees. “The banks are saying they are approving nine out of 10 requests, and that is probably true – but the biggest issue is that it is taking so long for requests to make it to the credit committee and then to get through.” He points out that while there is relatively little fresh debt going out of the banks there are problems with existing credit lines. “Companies with working capital requirements probably had them renewed automatically up until now,” he says.“Now banks are applying new conditions and new covenants to them and this means that they have to go to the credit committee for approval once again. And so much analysis of the companies goes on ahead of this that it can take months to get there, in some cases. No one wants to make a decision that might come back and cause them trouble in the future.”

This shortage of working capital is causing problems for businesses of all sizes. “Because there is no money moving around, companies are slower to pay and being paid slower,” says Flynn. “This is affecting profitability and asset values in almost every sector.”

Working capital is a requirement for every business and a lack of it can be disastrous, says White. “Working capital is what pays the bills as they fall due; it is the facility you need to be able to reassure suppliers that you will be able to pay them when you say you will. Without a working capital facility, no one will extend you credit.

But because working capital is an unsecured loan facility similar to an overdraft it is more difficult to raise in times such as these.” But what about businesses that need to raise or renew working capital facilities? “The companies that are successful in their financing requests to banks at the moment tend to be those who go to the bank early, before a problem arises,” says Flynn.

“They are going in with a three-year plan which explains why they need the money, how they are going to repay it and what will happen if they don’t get it. They are also offering solutions for the lender, not just themselves. If a business comes to a bank saying that it needs the bank to solve its problem, it just means that it is giving the bank its problem – that’s not going to work. Banks have enough problems without adding more. Businesses have got to understand the banks’ requirements if they are to get their requests approved.”

There are alternatives, some more palatable than others, should this approach fail. “Some business owners are looking to raise term finance to shore up the business’s working capital requirements,” says White.

“And there are other types of finance, such as invoice discounting and credit factoring, but it has to be said that these are getting more difficult and more expensive to obtain.” Among the less palatable alternatives is a voluntary scheme of arrangement with creditors. “It is very difficult in the current market,” Flynn says.

“Banks don’t have the money to lend and even companies worth tens of millions will still find it hard to get the banks’ attention when there are property loan books of billions to be sorted out. . . The focus is on Nama [the National Asset Management Agency] and how that will work.

“For companies finding themselves without the necessary working capital to keep going, a voluntary scheme of arrangements with creditors is an option. “This might see debts being deferred for a period or being written down to a lower level such as 75 cent in the euro. This is a good alternative to the more formal examinership structure where the court takes control and it is certainly better than going down the insolvency route.”

But there are a few bright lights, with some sectors more attractive to the banks than others. Anecdotal evidence suggests health care and energy are still seen as growth areas by banks, and finding it marginally easier to raise cash.

However, there is a difference between funding existing facilities and funding new projects; new and unproven projects are still finding it very difficult. Flynn also expects some general loosening of credit towards the end of the year.

“If only because of the political pressure that will arise from the €7.5 billion of public money that has gone into the recapitalisation of the banks, I would see more credit flowing to businesses and some sort of freeing up of the system towards the end of the year,” he says. “Things will still be difficult, though.”