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27-05-2010

Irish SMEs must adapt to new ‘lending dynamic’ - Mazars

The lending dynamic has changed forever and Irish businesses must accept this if they are to succeed in securing bank financing, according to Tom O’Brien, Partner Financial Services, Mazars.

Addressing the inaugural Mazars Finance Directors Forum, Mr. O’Brien said that companies need to demonstrate the financial viability and sustainability of the business as banks return to “sensible” lending policies.

“The new reality is that banks are applying more traditional criteria and many SMEs are not addressing these criteria in their loan applications, probably because they do not fully appreciate how loans are now being assessed.  Greater communication from banks to their business customers would help in this regard”, said Mr. O’Brien.

“Cash is king and companies must show detailed cash flow projections and demonstrate an ability to meet all interest payments over the loan term.  Greater equity input from borrowers is now required”, he said, “and we are seeing lower loan to value ratios being offered. Business owners must also be aware of the greater emphasis now being placed on personal guarantees”.

“It is very important that new proposals demonstrate risk sharing, are realistic and stress test a range of potential outcomes and contain contingency plans to cope with the unexpected.

“One of the biggest changes we are seeing is the focus being placed by banks on the quality of the management team and the quality of external advice available to the business.  Borrowers must demonstrate a track record and a vision for the business backed by strong business performance metrics. 

“Relationships are critical in the current environment.  We strongly advise companies to talk to their bank to make sure that they understand the business. If you are seeing early warning signs of distress talk to your bank, in the current environment, they are willing to look at creative solutions to assist companies work through their difficulties”.

Mr. O’Brien added that banks were offering shorter repayment periods on term facilities and that non recourse lending is generally not available. 

“The fact is that the criteria now being applied are what would have been demanded ten or fifteen years ago. We have seen where speculative lending has led us and we should welcome the return to old fashioned traditional lending, and the fact that banks are focused on providing finance to viable businesses.  

“There are many viable businesses in Ireland and with government setting new business targets for the banks and the establishment of specific small business funds by the banks, if applications address the new lending criteria I do believe cash will start flowing to our viable SMEs”.