Private investors open a door to new flexible funding for SMEs

Small firms are availing of a range of new alternative funding options as confidence builds in the local economy
Private investors open a door to new flexible funding for SMEs

Paul O'Donovan (centre) with members of staff at accountants Paul O'Donovan and Associates, Cork. Picture: Gerard McCarthy

Private equity investment options and a range of new alternative funding sources are offering SMEs a choice of viable routes back to business growth.

Many SMEs have also been quick to avail of the State's various schemes to help sustain business through the Covid-19 pandemic. These various funding lifelines are being seized by SMEs, as was clear at the recent Paul O'Donovan & Associates (POD&A) virtual annual conference.

The Cork-based chartered accountancy firm has worked with the main banks to obtain moratoriums and extra finance for its client companies. While POD&A continues to work with the pillar banks, it is also working with new alternative private funders.

State grants are playing a critical role in sustaining SMEs. To date, POD&A has helped its clients access Government loans and supports worth over €20m.

“Since March 2020, the Irish business community has adapted to a changed environment,” said Paul O'Donovan. “In the past year, we have expanded our service offering to become mentors on the boards Enterprise Ireland and the LEO network.

“This allows us to advise our clients on the various grants and supports which the Government has made available. We are also working with our clients and the Revenue Commissioners on the warehousing of tax liabilities and putting instalment arrangements in place.” 

 The Government has made more than €16bn available in supports, such as the Financial Planning Grant, Business Continuity Voucher, ReStart grants, EWSS, TWSS and CRSS.

The past year has also seen increased funding with the Strategic Business Corporation of Ireland (SBCI), loan facilities such as the Future Growth Loan Scheme, Covid-19 Loan Scheme and Credit Guarantee Scheme.

The POD&A conference also included a focus on the range of new private funding options open to SMEs. This panel discussion was led by Mark Flood of Renatus and Alan O'Dea of Beechbrook Capital, both very active in new alternative funding markets.

Mark Flood said: “The traditional banks aren't closed, but they're rigid. It is getting to the point in a lot of cases where the computer says 'Yes' or 'No' to a certain extent.

“At a simple level, if there's no asset backing in the business, they'll probably look at your definitive de facto last 12 months profit and give you 3X that in senior debt. That can be boosted if there are asset backing in the business, if there are contracts signed, if there's a lot of recurring business.

“You kind of know in advance what you will get from the pillar banks. Then there are a myriad of options between that traditional pillar bank offering and equity. It is all about aligning the options to your business.

“You can probably predict what you'll get before you go in to the banks. Then at the far end you have equity, and you have a hybrid in the middle. You've just got to marry your options to your needs.” 

 Mark Flood said finding the right balance between equity and debt is all about choosing the right instrument for the task at hand.

Alan O'Dea agrees. In the last 12 months, Renatus and Beechbrook have been very active in the Irish market, providing funding for companies looking the scale up and expand.

Both say that their funding model allows them to take a long-term view of the businesses they're investing in.

In the Irish market, Beechbrook offers five-year terms, non-amortising, interest-only loans.

Alan O'Dea said: “The purpose of that is so that we're aligned with the growth opportunity within the business. We feel that the five-year loan allows the business adequate time to execute its business plan, achieve its return on invested capital. Likewise, the interest-only element is to allow the company to reinvest the free cashflow in the business so as to accelerate that growth.”

 He says that when a business is at a stage to seek external capital, private debt or private equity, it is their most important decision to date; it is potentially transformational for their story.

Alan O'Dea explains: “It is critical that you establish what your business plan is, what your capital requirements are over the next number of years to meet that plan. Ultimately, that will dictate what type of capital structure is appropriate for your business at that time; and that will help you identify the range of sources, whether it is private equity or private or traditional bank finance.

“We play a part in the funding ecosystem. We're not competing with either private banks or private equity. We all play a part. We work with specific business goals at a specific time. You must look at a business across its entire life cycle.

“Initially, a business may use venture capital, or early stage capital, to get the business to a certain stage to generate a sustainable level of revenue and profitability. It may then seek to embark on the next phase of growth; that may be organic or it may be by acquisition.”

 Mr O'Dea says SMEs are turning to new funders because they offer greater flexibility, both in the use of funds for development growth or perhaps international expansion, or a shareholder realignment that will free up the balance sheet and provide the catalyst for growth.

Mark Flood adds: “There is an evolving landscape of alternative debt and equity. There has never been so much money in the market. There are so many brass plates around Dublin, Cork and elsewhere investing in Irish businesses.

“There is a plethora of options now available beyond traditional bank financing. It's a matter of marrying the personal goals to the options available.”

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