Last week’s headline on the ISME survey “Access to credit is abysmal” barely raised an eyebrow in the media. After 5 years wrangling over who is to blame, this was another episode in a destructive argument. There seem to be light years between the world according to the banks and the world according to their customers. A handy training video on the Failte Ireland Website on SME credit access gives a summary of the official picture including the Government backed micro credit facility and the loan guarantee scheme.
SMEs shout lack of access to credit, the banks retort on lack of demand.
The ESRI said in April of this year that only 4 to 11% of Irish SMEs experience credit constraints. Yet a Central Bank report from last August said Irish Banks have the lowest approval rating of loans to small business in the euro area. The report was “flatly rejected” by the banking industry. The IBF meanwhile tell us of a new streamlined application process. Mark Fielding of ISME tells us that the application is in fact getting more torturous while “zealous bankers terrorise owners of SME businesses….” Fielding notes that 57% of loan applicants in the last quarter were refused (according to an ISME survey) and calls the bank statistic that 8 out of 10 applications are granted as a “sad national joke”.
The debate continues… and reading these reports it is hard to know who to believe.
But there is a key point missing in much of the commentary. While templates and codes of conduct may be part of the answer, the crucial key needed by the SME owner to unlock credit is “the ability to demonstrate financial literacy”.
SME credit access is and always has been tough – everywhere, not just in Ireland. There are reasons why things have become even harder in Ireland in recent years. Credit in general is scarce. The collapse of the property market makes it hard to lend against collateral. Recent financials may not look too pretty as businesses struggled to adapt to change. Banks are now lending against the business plan. And where this is the case the banks and borrower have to be able to discuss the business – in language they both understand.
A group of SME owner/managers I worked with recently in the strategic finance module on the IMI Diploma in Strategy and Innovation were unanimous: learning to look at their business through the eyes of the bank was the single most useful ambition for the module. Ten years ago some might have delegated that task to a “finance expert”. Now they recognise that financial literacy is not something to be outsourced. The owner/manager must to be able to explain, convince and defend the business plan.
Despite recognising the power of financial literacy, many owner/ managers seem reluctant to train to develop the understanding themselves. This may come from a misplaced belief that a subject as vast as finance cannot be tackled by less than the pain and misery of a four year accounting qualification.
Not so. I am constantly amazed at the transformation in skill and confidence that comes from a short investment in learning. A little knowledge of finance goes a long way in securing a loan application.
There are nagging doubts that the “lack of demand” is due to businesses afraid to apply because of onerous conditions, informal discouragement before the business even downloads the application form. This presents a real crisis – one of missed investment opportunities and unrealised growth.
The most frequent feedback I hear is “it’s all so much simpler than I thought”. I would encourage SME owner managers looking for business finance to take the reins in improving their financial literacy and tip the odds in their favour.
After all if you can run a business, understanding a balance sheet should be child’s play indeed.
Moira Creedon is a teacher and consultant in Strategic Finance and has worked with both corporate and public sector clients worldwide helping decision makers at strategic level to understand finance and improve their ability to formulate and implement strategy. She teaches on IMI’s Diploma in Management, Diploma in Strategy and Innovation and Senior Executive Programme