- Expert View -
SOURCES OF FINANCE
by Nigel Watkin
As we move into 2012, many businesses are switching from a static view of the market to a growth-oriented attitude. Growing a business means, most of the time, investment, which can be done either by borrowing funds or by injection of cash reserves (congratulations to those who still have any!)
So, apart for those very few who have enough reserves left to finance expansion, where can cash be found? The NZ financial landscape has changed dramatically since 65 finance companies collapsed in 2008. These used to be the traditional way for Kiwi businesses to purchase plant, machinery, motor vehicles or contracting equipment. The banks, on the other hand, used to provide only overdraft type of funding. But with only six major finance companies left and a number of second tier lenders, habits are changing. Building societies, credit unions and a growing list of private lenders are becoming more active in the business lending area. So this begs the question: "Where is the best place to borrow for cash injections or asset purchase?"
Bank funding is obviously the first choice but let's be clear about the options they will provide. The fact is, banks have plenty to lend. However their criteria is tougher than it was three years ago. Generally if you are borrowing for overdraft, stock, business purchase or a term loan, the bank will request property as security and this would probably be your family home. Additionally, you would need a sufficient cash deposit, typically 25% of the purchase price, or again they would be looking at other property as additional security -if you have it.
Finance companies remain the core lenders in the asset purchase field. However there are so very few left now that credit is scarce. Also, the 1st tier players have tightened credit criteria for lending. The finance companies below this level have lower credit criteria but they do charge more for it -as they perceive the risk to be greater. They don't generally take property security as a rule. The days of no deposit borrowing are no longer here so if you don't have any they will probably require other assets as additional security, e.g. another item of plant or vehicle.
Private lenders generally are very security minded and wish to be rewarded well for their investment. They like property security and in some cases can offer to take a more direct approach by getting a stake in the business. This can be a good thing at times, given their level of expertise (when it can be substantiated).
The ultimate way to ensure that you are able to get funds when needed is really simple: ensure that your accounts are up to date so lenders can see historical data. Always have cash flow forecasting in place and track your results alongside those at all times. There's never been a better time to practice the Boy Scout motto: Be Prepared.