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NEWS that Ireland’s newest “bank” is actively channelling low-cost loans into the SME market is music to Sean Greif’s ears.

Greif set up Moontour in June 2014, combining Irish language lessons for children with physical activities such as surfing, kayaking, DJing and photography.

A former Irish teacher, he came up with the idea when he realised that he had learnt as much Portuguese working in the Brazilian rainforest in six months as he had Irish in 20 years of education.

Having proven the concept over the summer, his aim is to roll out year-round courses for adults too.

That will cost money. “I can’t grow the business organically because I can’t keep pace with demand and being under-capitalised is a risk,” said Greif. “I’ve already had to turn people away and I don’t like doing that because they might not come back.”

He is not manufacturing or providing an internationally traded service so he has not secured funding from his local enterprise office. He considered a bank loan but ruled it out as “too expensive”.

The Strategic Banking Corporation of Ireland (SBCI) — a fund rather than a bank — has been dishing out millions of euros since March, providing loans specifically designed for small businesses. It may be Greif’s next port of call. “I’d definitely be interested in applying.”

Launched by the government just over a year ago and tasked with creating a more competitive finance market for SMEs, the SBCI has been pumping money through intermediaries AIB and Bank of Ireland since March. As of early November it has provided €110m in lending to 3,200 SMEs. The average loan size is €34,000, and loans of up to €5m are permitted. To date its largest deal has been for €4m.

Liza Sagawn needed €20,000 last May to buy a Curves fitness business in Knocklyon, Dublin. “I went to my local bank where they already knew me because I’d been managing a different Curves studio for years,” Sagawn said. “When I told them what I was hoping to do, my relationship manager told me about the SBCI loans. We worked through all the options and it was definitely the most affordable one.”

Since May, she has doubled membership at the studio and now hopes to buy a second Curves franchise. “The business is profitable, I’m paying all my bills and taking a small salary too, happy days,” she said.

The SBCI plans to provide €800m in lower cost, longer term loans for SMEs. It is co-financed by the German promotional bank KfW, a development bank owned by the German government, the European Investment Bank (EIB) and the Ireland Strategic Investment Fund (ISIF) — formerly the National Pensions Reserve Fund. Two further funding bodies are due to come on stream in the new year.

So far only AIB and Bank of Ireland have provided intermediary services for the SBCI, with Ulster Bank expected to become a channel partner soon.

In October, Finance Ireland, a specialist SME lender, became the first non-bank SBCI partner, with the announcement of a €50m equipment, machinery and vehicle finance programme.

This month Merrion Fleet, a fleet management company, also became an SBCI partner, with the announcement of a new €25m fleet finance fund for Irish SMEs. This brings total funds committed by SBCI to €475m to date.

According to Jimmy Connellan at Merrion Fleet, the SBCI deal will enable the company, which has traditionally supplied services to large multinationals with fleet requirements of up to 300 vehicles, to provide contract hire services for smaller businesses too.

“We’re not talking ‘man in a van’ but typically we’d be targeting small businesses with as few as two to three vehicles,” said Connellan.

The savings aren’t enormous. On a €30,000 vehicle, the contract hire price of a deal funded through SBCI would result in a saving of around €25 a month to the small business owner, he reckoned. “Over the term of the deal, however, you could save €1,000,” he said. “And it will be open to existing customers too, if they meet the EU definition of an SME, which is up to 250 people and a turnover of less than €10m.”

Part of the rationale behind SBCI was to break Irish business’s dependence on traditional bank borrowings. According to Michael Noonan, the finance minister, speaking at the launch of the SBCI last year, 75% of SME funding in countries such as the US comes from non-bank sources while in Ireland it is only about 25%.

Providing access to competitive finance is only one part of the programme, increasing non-bank lending options is the other. Peer-to-peer lenders are among those talking to SBCI. The fund would de-risk loans for individuals providing crowd-based loans to small businesses, and help move a relatively new form of finance into the mainstream.

“It would be a huge psychological boost to people to see a government agency behind a particularly innovative source of finance,” said Patricia Callan, director of the Small Firms Association.

Peter O’Mahony, founder of Linked Finance, Ireland’s biggest peer-to-peer lender, facilitated €1.5m worth of lending this month alone to 50 businesses. It is currently in discussions with SBCI.

“This is EU and government money, so there is a fair bit of due diligence to go through, but anything good is worth waiting for,” said O’Mahony.

Average deal sizes are up too, from €20,000 last year to about €30,000 this year. Borrowers can secure rates as low as 6%. Through Linked Finance the average is 9.7 %. This compares well with traditional bank lending between 9% and 12%, depending on the security on offer. SBCI loans have a typical discount of about two percentage points.

Loans through Linked Finance are unsecured — a large element of their appeal for SME borrowers. Also appealing is the speed of decision-making. “With us, you get approval within eight hours and the entire process, from start to finish, takes 14 days,” said O’Mahony.

The SBCI simply provides the banks with funds; the financial institutions underwrite the risk and suffer the loss when things go wrong. As such, applicants may not find it much easier to secure SBCI funds than through traditional bank lending. ISME research in September indicated that the number of bank refusals had actually risen.

“It is to be hoped that that was just a blip, after two years of improvement on the loan approval front, but we’ve only this week sent out a survey to update those figures so we don’t yet know,” said ISME boss Mark Fielding.

He feels that inadequate training in risk assessment is still having a dampening effect on the market, particularly the continued insistence by many bank officials on getting personal guarantees from borrowers. “Nothing has changed on that front,” added Fielding.

Mike Kane of Curious Wines, an online retailer with stores in Cork and Kildare, secured a loan from Linked Finance last year and plans to use the service again. He found banks willing to lend “as long as you don’t need it”.

Bank staff asked for cash deposits before giving a loan. “If you had the cash, then you wouldn’t be looking for the loan.”

Andy McGowan
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