CEO Comment
Stop Borrowing Against the Family Home
As every SME (small to medium-size enterprise) owner in New Zealand knows, obtaining finance is never easy. Our banks have a love affair with mortgages and the reality is that 90% of SME bank finance is backed in
some way by property, ie the family home in most cases.
As every SME (small to medium-size enterprise) owner in New Zealand knows, obtaining finance is never easy.
Our banks have a love affair with mortgages and the reality is that 90% of SME bank finance is backed in some way by property, ie the family home in most cases.
There are pros and cons to this. On the positive side at least some finance is available and the rates are low, but conversely it limits the growth to the level of equity in the property and it certainly adds to the family stress!
So, are there ways to stop or at least reduce business borrowing against the family home? The short answer is yes, but in New Zealand we are not very good at it.
Ironically New Zealand leads the way in this area and the World Bank sees us as a ‘best practice’ country. We have a very good legal framework (based on our Personal Property Securities Act), a well-used online security registry system and active market lenders such as Lock Finance and others, who do not need property security when lending to the SME sector. However most New Zealand banks are simply not willing to use it and many SMEs are not aware of the alternatives.
In Australia, the United Kingdom and other developed markets they have very active asset-based lending markets, securing business loans against these “movable assets” ie inventory and accounts receivable. In the UK one in four businesses has asset finance and in Australia their activity is 50 times higher than us, so we really do lag behind badly.
So far in New Zealand the big banks are slow to provide these products and give SMEs more choice, but is there demand from SMEs?
Most SME businesses have a lot of money tied up in their inventory and accounts receivable but still seem to have a fixation with financing their businesses by borrowing against the family home. Furthermore many SMEs are stricken with inertia. There is that old “Boat-Bach-Beemer” attitude that once you have achieved a certain level of success there is no need to push further. If SMEs work their business that bit harder by using the assets to finance growth they can start to release the pressure on the home and get additional growth.
There are other benefits of switching away from mortgage based facilities to asset-based arrangements:
- the facilities fluctuate with activity, as the accounts receivable and inventory grows, so does availability
- keeping the business separate from personal assets makes it easier to sell the business as it is self-financing
- if the family home has to be sold for external personal reasons the business can continue without any disruption
- accounts receivable financiers often provide professional debt management and collection services alongside the finance facility so the business operates more efficiently
In summary Kiwi SME owners need to take a leaf from overseas trends and move towards getting their business debt independent from their family home. This will not be an overnight process and may take 2 years, 5 years or longer, but it is a worthwhile goal to aim for that will give greater flexibility. There are alternative ways to finance cash flow using the assets within the business and we lead the market in this area.
Simon Thompson
CEO, Lock Finance