Bank fund provides shelter from recession storm

James Mitchell

ASB Bank grabbed front-page headlines when it unveiled a $1 billion fund on the eve of the Jobs Summit which businesses could borrow from at below-market rates, provided they could demonstrate their loans would create employment, or prevent job losses.

Three months on, the bank has lent $15.5 million from the fund to 40 successful business applicants bank-rolling projects which extend their ability to fulfil new contracts, or buy other firms that would otherwise have been shut down with all jobs lost, introduce products and fund initiatives.

"The bank is obviously keen to see greater use of the fund, and is promoting it to accountants, business mentors, and other agencies," says ASB's chief executive for relationship banking, James Mitchell.

ASB's initiative is one of several the major banks are promoting to assist businesses weather the credit crunch and recession (see box).

In essence, ASB is discounting borrowing costs for a two-year maximum. "It is assistance to existing businesses under a degree of financial pressure but where we still believe there's a viable business to back over the longer-term," Mitchell says. After two years, all things being equal, the discounted loan will be re-priced at market rates.

"Hopefully in two years the current economic environment and conditions that we're in will have passed, and the business will be trading in a more normalized environment."

The borrowers have a variety of economic circumstances, with no particular trend having emerged.

Most are existing ASB customers, but some new business had come the bank's way. "Where that's happened, if we're refinancing existing debt we refinance the existing debt at market rates and provide the additional facility under the discounted rate.

Auckland-based companies had dominated the lending totals so far, simply because of the city's size.

He makes clear ASB's $1 billion fund is not geared at start-ups which he says are problematic as what they generally most need is capital, not debt.

"If you look at a start-up, the risks are much, much higher (than an established business), because there's no guarantee of success."

A mature company with a track record of success is lower risk from a banking perspective than an early-stage company. Angel investors and others in a similar market are just as pragmatic as banks about where they put their money, Mitchell says.

"A lot of people say they have difficulty getting money-but that's not because the money's not there - it's because they don't necessarily have investors who believe in their story,"

"One of the issues that people starting those businesses have to appreciate is that debt is not necessarily the right thing for them, and that they do have to bring in other investors and other capital," Mitchell says.

"Often they don't want to do that because they think they're o nto a good thing and they want to share all the upside by retaining a 100 per cent share of their business.

"That creates a conflict for them because the bank won't give them money and they don't want to dilute their shareholding, which leaves them wondering what to do.

"The reality is that you're better to get an investor in, get the business going and growing and have a smaller share of a successful business, rather than try and muddle along and not get to your full potential," Mitchell says.

ASB SPECIAL LOAN FUND
* Loans made from the $1b pool are available only to existing businesses for new lending.
* Current business customers and new customers can apply. The minimum loan is $100,000; maximum $10 million. They must be fully drawn down within 60 days of approval.

WHAT OTHER MAJOR TRADING BANKS OFFER

Westpac - Tailored assistance options for financially stressed customers such as interest-only repayment options; extending loans periods and postponing payments for up to 12 months (with interest to be capitalised into the loan).

ANZ - Advice on debt restructuring and adopting the best facilities where business owners want funds for capital investment.

National Bank - A series of three-hour workshops for small businesses covering networking, cash-flow management, and targeted selling.

BNZ - Integrating its business, agriculture and private banking specialists into teams operating as BNZ Partners to liaise with local businesses.