Banks assess each business application for credit on a case-by-case basis and on its own merits and each bank operates its own credit policy.
Key factors when applying for credit
There are, however, a number of key factors that banks (and other lenders) look to when assessing applications for credit. These include:
- Track record – the business’s credit history, its credit rating and its relationship with the bank
- Ability – the trading history of the business, the previous business experience of the owner and senior executives and evidence that the business is planning for the future
- Purpose – how the finance will be used and how it fits with the strategic objectives of the business
- Amount – a realistic assessment of the amount of finance that the business needs to achieve the stated purpose
- Facility – the facility requested, be it an overdraft, loan or asset finance, should reflect the stated purpose and the amount needed
- Repayment capacity – any lender needs evidence that the borrower will be able to repay the debt, both in terms of its current ability to make the regular payments required and its ability to repay the credit in full in the long term
- Security – a bank may require the borrower to provide security in the event of failure to repay the loan. This security may include property or assets
- Market – as part of its assessment of an application for credit, the bank will review the market in which a business operates to identify any positive or negative impacts it may have on the business
- Interest rate type – different interest rate types are available for this types of financing and the choice of rate type may depend on a number of factors including how the credit will be used and the risk appetite of the customer
The Banking & Payments Federation Ireland (BPFI) has developed Standard Small Business Credit Application Guidance. This is available on the BPFI website, with specific guidance for credit applicants in the hotels/leisure and farm business sectors.
The Credit Review Office (CRO), which reports to the Minister for Finance, has published guidance for small businesses applying for credit and has outlined the key steps in the application process. These publications are available on the CRO website here.
Banks must follow a code set out by the Central Bank in relation to lending called the Code of Conduct for Business Lending to Small and Medium Enterprises (SME Code). The Code addresses a range of issues related to bank lending including applying for credit, security or collateral requirements, credit declines/withdrawals, complaints and financial difficulties.
The Code was recently updated by the Central Bank with additional provisions regarding small businesses in financial difficulties and providing greater transparency around the credit process. This revised Code, now referred to as The SME Regulations, came into effect from 1 July 2016 for banks.
Declines and Withdrawals
Where an application for credit is declined, under the Central Bank’s SME Regulations, the lender must explain clearly to the borrower why the application was declined.
Applicants may seek a review of the decision to decline an application for credit or to withdraw an existing credit facility through the bank’s internal appeals procedures.
Small business and farm enterprise applicants to banks that have engaged with the NAMA may also apply to the Credit Review Office, which reports to the Minister for Finance. For more details on the Credit Review Office, including eligibility criteria and how to apply, please visit the Credit Review Office website here.