Banks ready to lend, but no takers

Andrew Thorburn says tough economic times mean many business are unwilling to take on more debt. Photo / Herald on Sunday

Mainstream banks say they are bending over backwards to try to lend to small businesses but the demand just isn't there.

Although some have eased their lending criteria, tough economic times mean businesses are either unable to meet them or are unwilling to taken on more debt.

The banks have come under criticism from small to medium enterprise (SME) owners, who say it is increasingly difficult to get finance.

A Massey University survey of 1500 SMEs found that many owners had relied on personal savings to back up their balance sheets since the recession began.

Research author David Deakins said businesses that had exhausted their internal sources of finance would then find it difficult to source external funding such as bank loans.

Reserve Bank figures show business lending has been on a steady decline from a peak of $81.1 billion in December 2008 to $72.9 billion in June this year.

Bank of New Zealand chief executive Andrew Thorburn says there are two sides to the equation. "The supply of funds is more problematic and the demand for funds is also not strongly evident in the economy."

Global money markets are still volatile, he says. Although the banks are striving to source more local funds, $13 billion of BNZ's total $60 billion balance still comes from offshore and that will need to be replaced.

On the other side of the ledger, businesses are reducing debt and not expanding. "We've got good business clients who are building cash, they're not making the big business investments at the moment."

Add that to the banks' natural need for prudence. "If we get more than a few per cent not paying back in total across our portfolio, that becomes a very material issue." The result is sluggish activity.

Banks need enterprises to borrow just as much as those firms need a flow of funds to keep growing. From a banker's point of view, reduced lending is bad business.

Thus, the banks are gearing up to better service their small business clients. "It's a fair comment to say we have needed to re-evaluate the picture," Thorburn says.

With 97 per cent of firms in New Zealand classified as SMEs, that is where the country's future productivity is going to come from, says BNZ's head of retail for small business, Tony Marlow.

BNZ analysed its SME lending and discovered it was turning down 65 per cent of applications.

So it launched a small business hub late last year in its Quay Park, Auckland premises. It has increased the number of its business bankers from 27 to 79, who are now available seven days a week.

Just over half are based at the hub, where they can video-conference with clients in other locations. The rest are in the branches.

"The site manager is back to being the dominant feature of our SME business," Marlow said.

The bank has changed the criteria for information it requires from customers and the way it processes it, taking a less analytical approach which makes it easier to understand the potential in a business, he says.

BNZ now approves two-thirds of applications and, in this financial year, will lend about $1 billion to small businesses - companies with a turnover of up to $1 million and five or fewer employees.

The banks now also see their role as key providers of advice and education to SME owners. National Bank also offers a range of business advice workshops on topics such as cash-flow management, managing staff and legal risks.

"Over the last two years, the cash flow one has been really popular," says head of business banking Andy Somerville.

Westpac has also focused on bolstering its support for SMEs, hiring an additional 150 business bankers in the last 18 months, says general manager of business banking Ian Blair.

They are in local business manager roles across the country. Economic conditions vary from region to region "so if you're not in these local communities it's very difficult to understand what's going on".

Its lending criteria hasn't changed. The difference is that it is more difficult for customers to meet those criteria, Blair says.

Whereas earnings before interest and tax (EBIT) at twice your interest costs may have been achievable in good times, now it's not so easy. "It is absolutely harder for small businesses to borrow."

Banks also like security and the value of the assets that businesses are securing their borrowings over has declined, he says.

The perennial challenge for SME owners is they need equity - whether it be cash, the capital in their house or a loan from family.

"Particularly for start-ups, small businesses need to have a good swag of equity in there because the risks are higher."

There is a difference between equity and debt, says BNZ's Marlow, and banks don't traditionally provide equity. They leave that to the venture capitalists.

His boss acknowledges there is a gap in funding for high-growth, high-risk enterprises.

Thorburn says he understands how people with a great business idea but not enough equity or security will feel let down.

Another part of the economy should be providing that sort of funding, he says.

"The mechanism by which they would get access to that [funding] isn't happening as smoothly as we need."

Starting a business

* Do some trial marketing - it could be as simple as talking to people.

* Make a list of all possible competitors and do a Swot analysis - their strengths, weaknesses, opportunities and threats.

* Build a competitive advantage - what will make you stand out from the crowd?

* Write a business plan - this includes goals, vision and strategy, marketing plan, management structure, financial budgets and forecasts.

* Do a cash flow forecast - helps identify periods where shortage of cash may occur and how you can get through it.

* Protect your business - insure your assets and for business interruption.

- Source: BNZ Work for Yourself pack