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FEATURES: SME LENDING
Advisers face SME loan challenge
Despite a raft of measures to kick-start SME business lending, clients have found it tough since the pandemic. How can advisers tackle the problem?
BY DANIEL DUNKLEY
As Covid-19 swept across New Zealand and the government enforced its first lockdown in March, Prime Minister Jacinda Ardern and Finance Minister Grant Robertson began their efforts to rescue the economy. A massive fiscal stimulus package and monetary policy support from the Reserve Bank were designed to help individuals and small businesses through the crisis, but months on, not everyone feels like they have received support from the financial sector.
In late March, the government and banks introduced a $6.25 billion business finance guarantee scheme to help small and medium sized firms through the crisis. The Crown agreed to take 80% of the risk of the loans, while banks took the remaining 20%. In November, the government extended the scheme’s interest-free period from one to two years, and extended the scheme by three years.
Despite the public support for businesses, advisers say their clients have struggled to obtain business financing since the pandemic. Commercial business financing has been difficult to come by, brokers say, despite government and Reserve Bank measures to stimulate business lending. Sole traders, and individuals borrowing against residential property, have found it easier to get a loan during the global crisis.
According to many advisers and local businesses, the government’s business loan scheme has been too slow in reacting to SMEs’ needs. Accessing the scheme through the major banks, mum and dad businesses have been forced to provide detailed Covid recovery plans to their lender, and hand over forecasts based on figures at the depths of lockdown.
Leading advisers say business clients are being made to jump through hoops by the banks, with lenders nervous around backing SMEs in the middle of the Covid crisis. They say lenders are asking business owners for accounts and forecasts two years ahead. Advisers said NZ’s largest bank, ANZ Group, was putting borrowers under the greatest scrutiny.
Banks across the board are asking for detailed financials around the past six months, with some basing their decisions on post-lockdown trading figures.
Geoff Bawden
‘Banks in general remain risk averse and pessimistic about the market and borrower stability, despite being encouraged to lend, and the evidence that the market has not retracted as they predicted’
_ Geoff Bawden
One adviser says ANZ used the six month period after March to project finances for the next two years, a situation that did not paint a realistic picture of their client’s business. They say ANZ declined their client on that basis.
“Some banks are a bit braver when it comes to business,” the adviser says. “And I took my client to BNZ.”
The adviser says it “pays to shop around” in the current environment.
“Just because your own bank is worried about what happened, it doesn’t mean other banks are. Some banks are definitely braver. But if you don’t have a house as security for a loan, then you’re probably in trouble.”
Q Group's Geoff Bawden agrees the banks have made it hard for businesses, including sole traders.
“Very few businesses were able to come out of lockdown unscathed, and they are having to demonstrate with current year financial data (generally MYOB or Xero) that turnover and profitability remains stable. That can be very difficult to prove. Banks generally are not willing to rely on previous yearend results.”
Other advisers believe banks have scaled back their risk appetite since Covid: “The appetite for commercial seems minimal from what I have seen,” says Craig Pope of Wellington based Pope & Co Mortgages.
Craig Pope
_Craig Pope
Bawden agrees, and says banks were ignoring the positive signs for the NZ economy, since the elimination of the virus on our shores.
“Banks in general remain risk averse and pessimistic about the market and borrower stability, despite being encouraged to lend, and the evidence that the market has not retracted as they predicted. There is now also some emerging evidence to suggest that the long-term hit on incomes might not be as severe as originally expected.”
He said banks were likely cautious as further outbreaks have, and will, happen again.
“To be fair, let's acknowledge that those things could change in the blink of an eye should there be further community outbreaks of Covid-19,” Bawden adds.
Not every adviser has found it difficult to get business financing. iLender’s Jeff Royle said finding business lending with security has been “pretty easy up to 80%, and with unsecured, we forward to Prospa, with good results.”
“Generally the whole business sector is in pretty good shape and [has] a very positive outlook, other countries will be looking on with envy,” he adds.
Adrienne Church
_Adrienne Church
Prospa is one of a group of non-bank lenders to capitalise on the banks’ behaviour since the Covid crisis.
Adrienne Church, the Australia-based lender’s head of New Zealand, says the lender has posted a 265% quarter-onquarter increase in loan originations in the three months to June.
Church says NZ businesses are showing strong signs of resurgence, but their needs were not being met by the major banks.
“Banks have pulled back on their risk appetite,” she says. “But there are some great stories out there, and companies looking for financing. We’re getting deals from the broker channel and direct channels.”
Church says many companies are looking to expand and grow, rather than get emergency financing. “People are trying to get stock in for Christmas, they want two containers instead of one, or three instead of two. There are positive signs out there and everyone wants to be up and running in the lead up to summer.”
She notes a wide range of businesses, from tradies to exporters to arts businesses, are in need of financing.
“We worked with an art gallery in Queenstown. Obviously they weren’t seeing a lot of tourists, so they wanted funding to take their gallery online. We were able to help them with that,” Church says.
“Another business was importing paint from overseas and selling in-store, but they have had to change their business model, source locally, and set up an online distribution model. The bank wanted forecasts from them and Covid business plans, but we could provide financing.”
Church says business owners can often find themselves giving up residential property security on their businesses when they don’t have to. Prospa does not take residential security on loans under $100,000, and provides financing up to $300,000 with general security agreement (GSA) guarantees.
“Taking out residential security against your business mixes your business life with your personal finances, and we don’t believe business owners should have to do that.”
Amid the Covid crisis, Church says more businesses should look beyond the main banks for speedy business decisions.
Prospa uses its fintech to analyse realtime business data, using recent sales and income figures to make decisions within 10 minutes. In contrast, bank lending decisions linked to residential security can take days and weeks to come through.
“Our credit engine looks at everything. If you’re paying your bills on time, your rent, or if you’ve got a rent reduction because of Covid, our systems analyses that to make a decision.”
Following the extension of the government’s business loan guarantee scheme, Church hopes that non-banks will be included to deliver the muchneeded funds for Kiwi SMEs. Prospa is lobbying to get alternative lenders included.
“Hopefully we can widen that and get the money out much faster,” Church says. “By including only banks in the scheme, it limits decision-making to lenders with a narrow risk appetite. ✚
