Bank Association

Bank Financing Mechanisms for SME’s : 

Bank Financing Mechanisms for SME’s 6th Meeting of National Co-ordinators for Countries of the Western Balkans and Moldova 29th April 2005 Charley Swords Institutional Support to the Kosovo Bankers Association Institutional Support to the Kosovo Bankers Associations An EU project managed by the European Agency for Reconstruction

Where are we Now? : 

Where are we Now? Members of EU countries learning from each others’ ‘best practices’ in promoting small businesses. EU member banks supporting SMEs to grow through the provision of strong products and expert advice. European countries and economies moving from ‘Tortoise’ to ‘Tigers’. Broad, strong and growing SME sectors. Prudent Borrowings and strong Cash Flow Management ……..the key to SME success!

Looking Ahead : 

Looking Ahead What will the Western Balkans be like in 2010? What will the SME Sector be like in 2010? What should Banks and SMEs be doing now……. - to overcome threats… - to maximise opportunities?

Key Requirements for Funding Decisions : 

Key Requirements for Funding Decisions Careful use of the following sources can contribute a great deal to a lending decision: Customer’s credit history and legal background Financial Reports Economic and Industry Data Personality and Culture

The Business Plan : 

The Business Plan A prerequisite to sourcing any finance for your business. It should be clear, concise and comprehensive, containing key sustainable information on the following: Management Product or Service Markets The Business Financial Projections Finance Required Security available Management Information Systems

Cash Flow Forecast : 

Cash Flow Forecast Managing cash flow is one of the most difficult management challenges facing businesses today and it should be an accurate reflection of the following: Monthly Receipts Based on cash sales / credit sales / other How much will be received each month Monthly Payments Based on cash purchases / credit purchases / other How much will be paid each month Monthly surplus / deficit Will you need an overdraft facility to fund the deficit? Are you consistently in deficit and if so, what practices can you improve in addition to seeking funding support? Forecast must be realistic, based on actual trading data and should not be produced to simply “give the bank what it wants to see!”

Funding Mechanisms : 

Funding Mechanisms Many and varied options, both with and without Government guarantees. Lending criteria, terms and conditions apply according to individual banks and institutions. Benefits to be gained from business lending expertise and support in banks and institutions. Remember – “No Pain – No Gain”

Small Business Term Loans : 

Small Business Term Loans Flexible to structure repayments that meet the needs of the business. Use in conjunction with other lending products like an overdraft or as a stand alone source of finance. Term generally from 1 – 7 years. Rolling Stock Facility – small amounts rolled over at agreed terms over the life of a business contract. Payment protection option against inability of SME to meet repayments. Lending and business support expertise provided by institutions.

Business Overdrafts : 

Business Overdrafts The most common source of short-term finance available and normally used in conjunction with a current account. Flexible – used to fund day-to-day operating requirements of a business which could include working capital funding, seasonal fluctuations in business cash flow or dealing with late payments by debtors. Pay for what you use ……… when you use it. Can be renewed on an annual basis.

Invoice Financing : 

Invoice Financing SUPPLIER PAYMENT FINANCE Banks pay supplier invoices and in return, the customer provides the bank with a Bill of Exchange as evidence of indebtedness. Facilities can be agreed quickly and additional security in the form of personal guarantees or debentures are not normally required. Benefits: Strengthens a company’s buying power when dealing with suppliers and allows a business to: Buy in larger and more economical quantities. Fund extra stocking requirements. Fund new product ranges as well as seasonal fluctuations. Avail of additional discounts through prompt payment. Strengthen credit rating with suppliers.

Leasing : 

Leasing HIRE PURCHASE OR EQUIPMENT LEASING? Medium term finance for equipment and helps to spread the cost over an agreed term. Firm pays an agreed fixed rental which covers both capital and interest – this is totally allowable against the business taxable income (subject to legislation) Benefits: Fixed rentals allow accurate budgeting and forecasting and are a protection against interest rate fluctuations. Helps preserve own cash resources and bank credit lines, thus maintaining liquidity.

Insurance Premium Finance : 

Insurance Premium Finance Helps businesses optimise cash flow and ease the strain of making large ‘once-off’ payments every year – for example - public liability insurance. Benefits: Spreads the cost of insurance over 6-12 months, freeing up overdraft and cash resources. Fixed rates for duration of loan. Simple – premiums paid directly by bank to insurance broker or company. Minimum premium financed is fixed.

Benefits to SMEs : 

Benefits to SMEs Cash made more readily available to the business than through conventional facilities. Ideal for growing companies – as sales and debtors grow, so too, does the amount of money available. Companies can take advantage of additional business opportunities and realise their true potential. Improves a company’s liquidity and can help solve cash flow problems enabling companies to negotiate better supplier discounts. Companies to grow without diluting shareholders equity.

Commercial Mortgages : 

Commercial Mortgages Various types of commercial mortgage, tailored to meet business requirements for either purchase, extension or refurbishment of business premises, offering: 75% of property value. Option of capital moratorium for 2 years at start of loan. Option of repayment acceleration at any time. Regular repayment - part capital and part interest - up to 15 years. No interest penalty for early repayment.

Bonds and Guarantees : 

Bonds and Guarantees In recent years the demand for Bonds and Guarantees has increased, particularly in new and emerging markets. They are required by the buyer/importer as an indication that the seller/exporter will fulfil their obligations. Parties involved in a guarantee: Buyer – also the importer and the beneficiary of the guarantee. Seller – also the exporter, the applicant of the guarantee and the supplier of goods and services. Guarantor – the bank who issues the guarantee in favour of the beneficiary (buyer) on the instructions of the applicant (seller).

Government Guarantee Schemes : 

Government Guarantee Schemes Most of Europe has seen some form of Government Guarantee Scheme. The level of success has varied a lot, because it had everything to do with …. PEOPLE! Not Policy, Procedure, Practices ….. But…. PEOPLE!

Small Firms Loan Guarantee : 

Small Firms Loan Guarantee Successfully operating in the UK since 1981 and enhanced in April 2003: a Government backed scheme administered through the Small Business Service Guarantees 75% of the loan from banks and other financial institutions. For small firms with viable business proposals, but who have failed to get a conventional loan because of lack of security. Firms annual turnover of up to €4.5m - and €7.5m if in manufacturing. Some exclusions and restrictions. Commercial aspects of the loan are matters between the borrower (SME) and lender.

Small Firms Loan Guarantee : 

Small Firms Loan Guarantee Minimum amount guaranteed €7,500. Maximum amount guaranteed: €150,000 if trading for less than two years €350,000 if trading for more than two years Medium term lending – 2-10 years with Staged repayments. Capital repayments deferred – agreed at outset and can last for 6, 12 or 24 months. The business pays the Government a premium of 2% per year on the outstanding loan amount. Loans available for both new and existing businesses.

Small Firms Loan Guarantee : 

Small Firms Loan Guarantee Used for: business development financing a project starting up or expanding an existing business and improving efficiency. SME must satisfy the lender’s commercial appraisal and be able to demonstrate that the loan can be repaid. NOT to be used for: Buying a company’s shares Buying out members of a partnership Replacing an existing loan or overdraft facility Financing interest payments Exporting.

Government Guarantee Schemes : 

Government Guarantee Schemes The other side of the coin……………… Operated in 70’s and 80’s to help those small companies with no capacity to borrow. Cash flow based lending applied. Used for Companies with good business ideas and banks did not seek or expect Personal Guarantees Minimal risk for banks due to Government backing, as Government set the qualifying criteria. High failure rate due to key company personnel not having solid business skills. Scheme ultimately phased out.

Banking Challenges re SMEs : 

Banking Challenges re SMEs The SME Sector is very diverse and presents big challenges to those who wish to bank it. Though the economic and regulatory environments differ around the World there are some common challenges for bankers addressing the SME sector. BUSINESS FAILURE SMEs are the product of an entrepreneurial environment and will always experience a higher business failure rate than large, established corporates – here are some identifiable reasons why some SMEs are more likely to fail than others: Rapid Growth – SME firms on a high-growth track tend to suffer relatively higher failure rates High-risk Attitude – the personality of entrepreneurs plays a role in the risks a business takes Lack of Management Experience – ability to make the right decisions is improved through practice Low Capitalization – under-capitalised firms have much less resilience to unexpected events Chance – interruptions in business continuity can have a dramatic impact on SMEs

Banking Challenges re SMEs : 

Banking Challenges re SMEs Marketing and Customer Relationship Management The acquisition of customers is complicated by the widely varying nature of this segment. Naturally a segmentation strategy needs to be adopted but this is difficult for a number of reasons: New entrants to the market will have limited information with which to segment their customers SME customers have very different view of the relationship with their bank – from anonymous and distant source of funding to trusted friend and business advisor The best propositions already have the attention of competitors

Banking Challenges re SMEs : 

Banking Challenges re SMEs Human Resources Because SME customers differ so much in their banking requirements, bankers are required to have a particularly flexible and broad skill-set, and access to resources. The ideal SME banker has: A general understanding of economic issues and how they affect SMEs A knowledge of political, regulatory and legal issues that effect their customers A broad business knowledge encompassing all aspects of the management of SMEs Good judgement and instincts about people and their personal attributes

Banking Challenges re SMEs : 

Banking Challenges re SMEs The ability to interpret, analyse and make decisions based on financial information Initiative in searching for knowledge and finding ways to help their customers An approachable and outgoing personality with a consultative approach to business development The skills to create and develop banking propositions which meet their customers needs It is a difficult process to recruit people possessing all these qualities and a challenge now is to develop these traits in current staff.

In Conclusion : 

In Conclusion ‘Grow as you Go’ – build relationships with your bank and prove your ability. Do not have unrealistic expectations of your bank. Responsibility for the business growth, funding and repayment schedules rests with the business owner. New EU Corporate Compliance clearly outlines the responsibilities of Company Directors. Legislation will have an impact on business development. Education for both Bankers and SMEs is key to building a solid skill base, on which to build. No Blame Game!