Business expert Finbarr Thomas looks at how small businesses can bypass the mainstream lending market to finance their growing businesses

For small Irish businesses, borrowing from banks has always been difficult. In the post-crisis era, it´s become tougher again.

A study by the Irish Small and Medium Enterprise Association (ISME) found that in quarter two of this year, 57% of small to medium-sized enterprises (SMEs) applying for bank finance of any kind were knocked back. Banks have also been phasing out the Irish SME’s borrowing tool of choice, the overdraft, preferring to convert such facilities into term loans that satisfy government-lending targets.

Beyond the banks

But for those struggling to obtain credit, there are more options than ever before. For very small businesses (fewer than 10 employees), who have experienced bank rejection, the government has set up Microfinance Ireland (MFI), a body which makes loans of between €2,000 and €20,000. Since its inception in September 2012, MFI has loaned €1.62 million to Irish businesses, who on average employ fewer than three staff and 100% of whom have been had their applications for bank loans rejected.

When asked what those applying for loans should do to ready themselves, Adrienne Murray, MFI chief executive, advises: “Have a well-researched business plan, clearly outlining the nature of the product, target audience, market potential and competition. Have three-year cash projections, six-month bank statements and details of existing orders.”

Mark Fielding, chief executive of ISME (an independent body that lobbies for better rights for SMEs), says that ISME has been pointing callers to its helpline in MFI’s direction. However, the main issue with MFI, he says, is the fact that so few businesses know about it.

The help of your peers

Another option Mark finds interesting is peer-to-peer (P2P) lending, based on the crowd-funding platforms sweeping the US and UK, through which individuals and companies finance product development with loans from online users.

P2P excludes institutional lenders of any kind completely – governmental or commercial. It sees unrelated individuals lending to one another (their peers), using an online platform. There are a plethora of such platforms in the UK, where P2P has been greeted in some quarters as a panacea to sluggish bank lending.

Ireland´s first P2P lending platform – LinkedFinance – opened to much fanfare this year, and so far all of the loans that it has tried to arrange have been successful. To apply, SMEs must fill out an online application (which is detailed, but which doesn´t harness the ratings of credit agencies) and if the application is pre-approved, their borrowing proposition is listed on an online database, where potential lenders (anyone over 18 with a valid passport) can see it.

Growing demand

Currently, there are SMEs bidding for total finance to the tune of just over €1m – and one look at the list of open bids shows how much demand there is to lend. For instance, there´s White Gypsy, a Tipperary brewer seeking €12,500, but which has attracted over 230% of that target from more than 160 different lenders; while Moth to a Flame, a Kilkenny candle manufacturer hoping to raise €8,000 to revamp its workshop, has raised over 260% of the total from more than 130 investors.

P2P lending gives those who´d like to invest a little of their own money (as little as they like) in something they find interesting the opportunity to do so. For borrowers, it gives them access to investment they couldn´t hope to tap otherwise. If you attract more than what you´re hoping to obtain, this will mean the interest rate you pay is lower. For Funding Circle, a UK P2P platform, the average interest rate is 5.8% –  much lower than the double-digit fees charged by many banks.

Do your research

For all of these options, you must make sure you´ve done your research and are as attractive an investment as possible. Tom Early, senior investment officer at Enterprise Ireland, says: “The two golden rules are: know how much money you expect to make using the finance, and know exactly what you want it for. There´s an element of realism required here.”

But for those fed up of the harsh reality of the banking sector, such initiatives can often prove to be a breath of fresh air.

Have your say

Have you had difficulty getting access to finance? How did you tackle the issue? Share your experiences.