Accessing affordable credit on favourable
terms is almost impossible for all but the best small business borrowers. Many
are struggling with credit restrictions as their bankers reign in on years of
loose lending.
SME’s have significant challenges. Increasing delays in receiving
payments when added to unsold stock has resulted in an endemic shortage of
working capital and decrease in cash and liquidity. Rising defaults and
insolvencies are leaving many without a key supplier and uncollectable bad
debts. A drastic drop in demand for goods and services has been amplified as Government’s
austerity programme undermined consumer confidence.
In a recessionary environment it is
tremendously difficult for small businesses to grow their way out of trouble. And
in a creditless environment, many viable businesses have no hope at all of
surviving. Most
cannot downsize as they are already small. With limited financing options they are
heavily dependent on bank credit. Overdrafts, the principal
small business working capital finance tool, are being rigorously re-assessed
by bankers anxious to limit their exposure in a recessionary economy.
In many cases businesses are being forced to
refinance all or part of their overdrafts as term loans. While it’s always been
prudent banking practice to require businesses to fund the long term working
capital element of their cash flows through term lending, today, this policy
has become a risk limitation tool to manage out boom-time hardcore debts built
up in overdraft facilities.
Bankers have two problems. The first relates
to allocating scarce capital to unused overdraft limits. They will be inclined
to roll back on limits to better manage their capital. The second relates to
SME lending risks which are continuing to worsen. From experience, bankers know
that as most small business owners are not financially sophisticated, they will
gamble for resurrection by using overdrafts to fund their bad debts. All too
often by the time the overdraft is called in, the business is already bust. To
counteract this problem bankers insist that businesses convert hard-core
overdraft debt into term loans and reduce their overdraft limit. The danger is
that aggressive overdraft hardcore management by bankers will undermine viable
businesses.
A recent story of AIB insisting on businesses
having to match their overdraft limits with cash deposits – termed compensating
balances, was denied by the bank which said it was not its lending policy to
require compensating deposit balances for business overdrafts. When asked if it
was reducing outstanding limits to better manage its capital, an AIB
spokesperson said “reducing the number of outstanding limits is not at all part
of the motivation or the decision making process when converting overdrafts to
term loans.” He explained, “when a hardcore builds up
in an overdraft, its standard practice for the bank and for the customer that
the overdraft or a portion of it be converted to a structured term loan to
better facilitate the repayment of borrowings”
While banks may not have a formal policy of
requiring overdraft compensating balances, it’s likely that when reviewing and
renewing overdraft limits, their managers are pressing businesses to place
money on deposit with them.
As banks have responded by toughening up on
credit terms, business trade bodies have been pleading for a range of responsive
measures from the Government since 2008. The Government’s response has been to
insist banks lend money to small business and to establish the credit review
office to second guess banker’s unfavorable loan decisions. It’s fair to say
that its response has been about as useful as a foot pump on the Titanic.
Access to financing has always been one of the most significant
challenges for SME establishment, growth and survival. Since
2008, the Governments’ meek response to a funding crisis facing small business
contrasts starkly with small business support systems introduced in other
countries. Elsewhere, countries have implemented extensive measures for
SME’s, including credit guarantee schemes designed to allow banks to make good
loans to good borrowers.
Other measures include export credit guarantees,
credit mediators who mediate between businesses and their bankers, favourable
tax regimes such as accelerated depreciation schedules, employment subsidies,
faster payment by state and public bodies and payment forbearance in “profit
insensitive taxes” paid regardless of whether or not a business is making a
profit. These measures target three areas: stimulating demand for goods and
services, preventing depletion of working capital and liquidity and helping to
maintain capital investment levels.
Months into a new administration, we have yet
to see a cohesive policy response to the immediate and long term funding
problems faced by viable small businesses. The only reference from this
Government so far has been a suggestion that something may be done for viable
businesses that are threatened by their owner’s boom-time property gambles.
While a job protection measure, it falls well short of the imaginative response
needed if small businesses are to be an engine of economic recovery.
A
version of this article appeared in the Irish Examiner, Business Section,
Monday 26th September 2011.
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