SME owners lacking in financial knowhow, says survey

A lack of financial literacy and understanding of debt among small- and medium-sized businesses has been uncovered by a survey.

Statistics New Zealand and the Economic Development Ministry surveyed 4775 firms, accounting for 80 per cent of businesses employing up to 500 staff. The firms were asked to provide details of all their requests for finance in the year to August 2004.

The ministry's director of smaller companies, Roger Wigglesworth, said the survey showed a clear preference for bank debt over equity.

"There were quite a few people who said 'What is equity?'," he said.

Many did not seem to recognise that the capital put into a business by the owner or family was equity and accounted for most of their funding.

Also surprisingly, only a quarter of smaller companies said they had used personal assets to secure debt raised during the year. Another study found up to 80 per cent of business loans were secured that way.

Many smaller companies appeared not to realise a personal guarantee over a debt put personal assets at risk, Wigglesworth said.

New Zealand firms also operated on low levels of capital compared with other countries. In the United States, small firms typically took off after about five years.

"Ours don't seem to and we don't know why, but there does seem to be some sort of link to capital intensity," said Wigglesworth.

Common presumptions that banks were reluctant to lend to smaller businesses and that New Zealand lacked a capital venture market were not borne out in the study.

Overall, a third of smaller firms sought additional finance during the period and 90 per cent had some approved.

"That would tend to say the system of finding money, if you need it, is not broken."

The main reasons given for rejections were insufficient income, cashflow or security.

Banks provided more than three-quarters of debt. Overdrafts made up about a third of that requested, followed by long-term loans at 27 per cent, and leasing or hire purchase and increased credit limits both at 24 per cent.

Nearly half of SMEs used additional debt as working capital and about a quarter spent it on machinery, equipment or vehicles.

- NZPA