Traditionally, Irish Pillar Banks dominate the Irish lending market and this is very much still the case. If your business can access credit from a Pillar Bank, it will be cheapest source of funding and will remain your first choice. The senior banking market is improving in terms of access to credit although decisions are still taking longer than business owners would like and price is not the only consideration for owners and management. Quick decisions, flexibility and increase leverage levels are also important. The good thing is there is a lot of choice in the Irish market at present for business owners looking at funding their requirements and the key is to know your options. Some alternative funding options include direct lending funds, invoice discounting, asset finance, finance leasing, supply chains finance and peer to peer lending.
Direct Lending Funds
Direct lending is carried out by debt funds who do their own review of funding proposals before approving the debt package. In the US it has been around a long time and is firmly established accounting for c. 85% of the primary loan market. In Ireland it has really taken off in the last few years following the financial crisis as traditional banks reduced their appetite for risk and cut back on business lending. This left a big gap for businesses who wanted to fund growth, acquisitions and shareholder reorganisations without giving up equity. Direct lending has looked to fill the gap between senior debt and equity.
Direct Lending is more expensive than senior banks but can be more flexible, offer business owners’ quicker decisions and on the venture debt side will take a view on company value which allows it look beyond short term cashflow and put lending packages together which a senior bank would not have an appetite for. This allows direct lenders to take on companies with higher leverage. Debt repayments can be structured to facilitate further capital expenditure requirements and debt availability can be up to 5.0x plus EBITDA. Pricing varies with interest rates of 6% to 15% plus depending on the type of business being lent too.
Over the last 2 years direct lenders have been very active helping fund acquisitions, management buy outs and growth. I feel direct lending funds, as a feature of the market, are here to stay and it is a positive for Irish business and for all stakeholders in the lending market. Some of those active in the market include BMS Finance, Broadhaven, Dunport, Capital Step, Muzinich Re, Proventus, Silicon Valley Bank and Harbert Management Corporation.
Invoice discounting is a form of funding which is very useful for growth companies who want to manage their working capital as they growth. The Invoice discount provider effectively lends against your debtor book in advance of the debtor actual paying for the good and services. In practice it involves selling unpaid invoices to a lender who lends cash against a percentage of the invoices handed over. The company gets funding upfront and the lender makes a margin when the invoices are paid. Invoice discounting is a much better tool than an overdraft for funding short term working capital. While all the banks provide invoice discount facilities, some of the other providers active in the Irish market include Close Brothers, Bibby, Capital Flow, Grenke.
Asset Finance / Finance Leases / Trade & Supplier Finance / Peer to Peer
Asset Finance is getting a loan against specific assets already own by the business and using these assets as security for the loan. These specialist lenders have valuations teams so they put a value on the asset (plant, machinery, vehicles, and equipment) and will lend accordingly. Effectively it’s like re-financing the asset. The release of finance can be used to fund further growth or working capital. Finance Leases can be used to make capital purchases, spreading the cost of the purchase over a period of time. Finance leases can be used to purchase IT equipment, machinery etc.. Most of the invoice discounters outlined above have finance lease / asset finance products and another in this market is Finance Ireland.
Supplier / Trade type finance is a form of working capital finance where funds lent are only used to pay suppliers. This allows businesses fund the supply chain early (potentially availing of early payment discounts) and bridges the funding gap between paying your supplier, getting delivery of goods and getting paid by your customers. Some of those operating on the supply chain finance side in the Irish market include Growcap and Tower Trade Finance.
Peer to Peer lending is where individuals lend money to a company, project or consumer in return for repayment of the loan and interest. One of the platforms available in the Irish market is Linked Finance.
Preparation is key when looking to obtain finance
While financing options are available, if you are considering a funding process it is important for Businesses to be prepared. The more prepared you are, the easier you make it a funder to understand your business and requirements, the better chance of securing the right funding option for you.
Depending on what you are looking for, the more detail is required but in terms of good practice having an information memorandum (IM) prepared on your business in advance of raising finance will add value. An IM is effectively a sales document which highlights what your business is about, the market you are in, your position in that market, the growth opportunity and reason why you are raising finance. It will include detailed protections which should be realistic and can stand up under review from potential funders.
A good corporate finance advisor can talk you through your options and will help prepare you for your funding process.
This appeared in the Sunday Business Post on the 28th of January 2018.