Irish businesses in need of capital have various options open to them, ranging from bank borrowings and State grants through to private equity and floating on the stock market. Deciding on the best option can often be the main challenge.
“Irish banks are typically the first port of call for most companies and we continue to close attractive loan deals,” says David O’Kelly, partner and head of M&A with KPMG in Ireland. “The lending environment is somewhat cautious but good companies that can express their business plan along with mitigants for business risks such as inflation, availability of employees and market turbulence are getting access to the funding they require.”
Falling interest rates are helping, O’Kelly adds. “While most companies recognise that base lending rates are higher than recent years, the decreasing interest rate environment, coupled with five-year fixed euro base rates below 2.5 per cent, means that many companies are raising debt at affordable levels.”
Asset-backed lenders and nonbank funders are also active in the Irish market and provide structures that suit many borrowers.
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“We see the nonbank lenders being most active during M&A deals where attributes such as low amortisation or looser financial covenants can help smooth a post-transaction period,” says O’Kelly.
“There is also a wide range of equity options available to companies. In Ireland we benefit from a good number of venture capital firms and private equity investors dedicated to providing capital to companies at different stages of development.”
Venture capital investors seek companies that will achieve strong double-digit growth, with an ultimate exit by way of trade sale, private equity or initial public offering (IPO).
“As a result, they have a strong focus on the size of the opportunity and whether the company has the key ingredients to take advantage of it such as a strong team, technology, market knowledge and a track record of execution‚” says O’Kelly.
Private equity is active in Ireland, acquiring majority or minority equity positions in established businesses, he adds.
“As a generalisation, we see private equity as more suited to situations where founders take cash off the table, coupled with funding an attractive business plan. The focus of investors tends to lean towards an evaluation of the team, quality of the business, competitive landscape and the probability of executing the business plan.”
PwC Ireland corporate finance partner Mark McEnroe adds institutional funding from pension funds and insurance companies, angel investors, asset backed lending, mezzanine funding and retained earnings to the mix.
“Asset-based loans are secured on assets such as stocks and debtors and can be provided by both high street banks and nonbank lenders,” he explains.
“Mezzanine funding is a hybrid of debt and equity and can result in the debt converting into equity if repayments are not met. It is more expensive than conventional debt. With retained earnings, rather than paying dividends to shareholders, companies can use retained profits to support the growth of the business.”
Understanding what the funding will be used for is critical in determining the type of finance that is suitable for a particular purpose, McEnroe advises.
“For example, if you are investing in an unproven product or service with no track record of cash generation, you would typically look for equity finance which doesn’t require repayments and can withstand the uncertainty in the short to medium term. Private equity or venture capital can be a good source of funds in such circumstances.
“However, if you are investing in a proven technology with a track record of consistent cashflows, you can look at a long term, lower cost debt product such as bonds or some form of institutional debt. If you are a seasonal business, you may want an asset based funding line which can flex up or down in line with your investment in stocks or debtors.”
State funding should not be overlooked. “A number of state agencies such as Enterprise Ireland, Local Enterprise Offices and financial institutions who distribute Strategic Bank Corporation of Ireland funds can provide a range of grants and low cost loans which can work out cheaper than conventional banks,” McEnroe notes.
“These can be accessed by submitting your applications to the relevant agency. They are typically focused on the SME market. At the larger end of the scale, corporates can access lower cost long term funding by accessing the bond markets.”
The bond market is not limited to large corporates, according to Lisa Sheenan, assistant professor in banking and finance at UCD Michael Smurfit Graduate Business School.
If the project is operationally risky you should be conservative in relation to your debt funding. If operationally it is low risk, you can be more aggressive in terms of the level of debt funding
— Mark McEnroe
“The US tends to be more market based,” she notes. “Europe tends to be more bank based. Smaller businesses can issue debt in the US. It is possible to do that in Europe, but it is untypical. Medium sized businesses should consider the debt market. The US has shown that it can work. Could be mindset.
“Since the pandemic there has been an increase in firms issuing debt but there is still a reliance on bank funding in Europe. A lot of businesses may consider themselves too small, but medium sized companies should definitely look at this option.”
Companies should be cautious in relation to the level of debt they take on, McEnroe counsels.
“If the project is operationally risky you should be conservative in relation to your debt funding. If operationally it is low risk, you can be more aggressive in terms of the level of debt funding.
“While debt has a lower cost than equity and overall returns can be maximised by increasing the level of debt in a project, this has to be balanced with taking on too much debt and potentially losing the entire project in the event that you are unable to service your debt.”
O’Kelly stresses the importance of a compelling business plan when approaching potential funders. “It is critical to have a well-thought-out and researched business plan that excites funders,” he advises. “Different funders will apply their lens to the plan ranging from equity upside to downside scenarios. Regardless of the reader, there is little excuse for not having a professional business plan.”