These days, there’s a thriving business finance market in New Zealand.
There’s a variety of alternative online lenders in NZ, with a wide array of different loan products to choose from. These have come about due to the knockbacks small businesses face when trying to get a loan from a traditional lender (banks).
As a result, small business finance is now more accessible, especially for businesses with more than five employees.
According to the Ministry of Business, Innovation and Employment around 94% of SMEs with 6 – 19 employees who requested debt finance could access it on acceptable terms.
There are many reasons SMEs seek business finance. Here are some of the most common.
Many SMEs opt for an unsecured small business loan because it gives them maximum flexibility.
With an unsecured loan you can spend the funds on anything you need, from covering fixed costs when income fluctuates, to pursuing unexpected business opportunities or grabbing great deals on stock.
However, the most suitable type of finance for your business will depend on your reason for borrowing.
Below is a handy overview of the options.
A flexible, short-term loan, usually between $5k and $250k. You can expect to borrow for up to 12 months, with regular repayments and interest calculated daily or weekly.
You can use an unsecured business loan to meet any short-term business need, such as paying tax instalments, boosting your cash flow or pursuing growth opportunities. Avoid using it for major, long-term purchases like plant or property, which could leave you with a financing shortfall when the loan expires.
Learn more about unsecured business finance at Prospa NZ.
Make sure you fully understand the pricing of the loan, including charges and interest rates
very quick service
A business line of credit (or LOC) is a flexible facility that works in the same way a personal overdraft does, giving you at-call access to an agreed amount of funds. You can draw down, repay and redraw the funds as needed, and generally only pay interest on the amount you use.
You can draw down funds for any purpose, but it’s best to keep the balance to a minimum as interest is usually calculated daily. It’s ideal for covering short-term gaps in your cash flow.
Factoring, or ‘invoice finance’, is a debt-free financing option. A factoring company will advance you up to 80% of the amount due on your invoices, and take on responsibility for collecting the receivable from your customers.
Invoice finance isn’t a loan, it’s simply an advance on your income from sales, so you can use it for any purpose – just as you would if you waited to collect the payment from the customer.
A short-term loan which you’ll automatically repay each day with a percentage of your card sales (credit and debit cards - EFTPOS) – ideal for businesses that make regular but fluctuating daily sales.
There are no restrictions on the way you use the funds from a merchant cash advance so it’s suitable for any business purpose.
Lease finance is a method of purchasing assets such as vehicles, plant or equipment for your business. The lender will purchase the asset in question and allow you to use it for an agreed period, while you make regular rental payments for use of the asset. At the end of the contract the asset belongs to the finance company, and you may or may not have the option to purchase it for a residual amount.
You can use lease finance to gain access to assets or property for your business without having to buy them yourself.
Hire purchase is a medium-term loan that enables you to acquire vehicles, equipment or machinery for your business with only a small up-front investment. The finance company will purchase the equipment on your behalf or to finance cars by using the asset as security. You will enjoy use of the asset immediately, but will pay for it in instalments over an agreed period. At the end of the contract you will own the asset.
Hire purchase is a popular method for buying business vehicles, equipment, plant or machinery.
A financing facility usually offered by traditional lenders to well-established businesses in need of a major cash injection.
Any approved commercial purpose, short or long term, including major purchases or investments.
The original business loan product, usually offered by high street banks like ANZ, Bank of New Zealand, Westpac and ASB. Often a longer-term option, with personal or business assets required as security.
Longer term, larger business purchases such as property, major plant and equipment or corporate acquisitions.
A short or long-term loan issued to you personally rather than your business and, if secured, using your personal property or assets as collateral.
You can use the loan funds for any purpose, such as buying stock, boosting working capital, or purchasing equipment for your business.
Business credit cards work on the same model as a personal credit card, giving you flexibility to spend, repay and redraw funds up to an agreed limit. Provided you pay off the full balance each month you can avoid interest.
There are few restrictions on how you use your business credit card, but unless you repay the balance each month it can be very expensive, so it’s best to use it for short-term purchases like consumables (or as an emergency back up when your cash flow is suffering
| Product | Secured | Rate | Fees |
|---|---|---|---|
| Bank Overdraft | Secured | 5.07% - 12.45% | $0 - $1280 |
| Secured Bank Loan | Secured | 2.97% - 9.83% | $0 - $3250 |
| Unsecured Bank Loan | Unsecured | 2.97% - 12.83% | $0 - $2625 |
| Business Credit Card | 5.88% - 20.95% | $0 - $450 | |
| Personal Loan | Secured | 7.75% - 19.09% | Included in Rate |
These three steps will help you evaluate your requirements and choose which type of finance to apply for.
It’s crucial that the term and type of your finance are carefully matched with your business needs and reason for borrowing.
Conduct a thorough assessment of what funding you really need in order to maintain or grow your business. You may find you need more than one facility to cover all your requirements – for example, a long-term loan to purchase a business property, medium-term hire purchase finance so you can upgrade your IT, and a business credit card for cash-flow emergencies – or that a single option like a line of credit may cover all your needs.
Loan repayments will be a regular drain on your working capital. Be sure to create realistic cash flow projections and a thorough business case as part of your planning process, to make sure that applying for finance is the right decision ats this time.
You may find that repayments on the loan you’re considering just won’t be viable on top of your existing financial commitments. If debt finance will be too much of a strain, you could consider alternatives like invoice factoring or merchant cash advances to help keep the cash flowing – or even turn elsewhere for cash, like an investor or crowd funding.
Before a lender will lend to you, they’ll need to ensure that the return from doing business with you is worth the risk. Each lender will have its own risk tolerance level, but the basic formula is that the less creditworthy you are, the more you’ll have to pay in interest and fees in order to secure finance.
To make it cheaper and easier to get a business loan, take a thorough look at your operations to see if you can lower your risk profile. See example
Once you’ve decided on the most suitable type of finance, you then need to choose the right lender and loan product – and the choices can seem overwhelming.
There are scores of alternative finance providers out there, but some focus only on particular types of customer (such as businesses in specific industries, businesses with a minimum turnover or trading period, or SMEs with poor credit ratings).
Successfully securing business finance generally comes down to preparation.
In addition to the steps you’ve already taken (analysing your needs, preparing your business case, minimising your risk profile and thoroughly researching the lender and loan product) you’ll need to gather or prepare supporting documents to submit with your application.
Depending on the type of finance and the lender, these could include:
For FinTech Lenders:
Required:
Optional:
For Traditional Lenders (Banks):
Required:
Once your preparations are complete, you’ll need to follow the lender’s application process.
For traditional lenders, this can be very cumbersome and time-consuming, and often beginning with a face-to-face meeting with a business loan advisor.
Online applications are usually far more streamlined.
If you’re applying for a business loan online, the process will usually go something like this:
Answer any questions from the lender, or supply any additional documents they require. In many cases, this won’t be necessary and your application will be assessed on the spot.
If your application is approved, you’ll receive loan documents via email which you’ll need to sign (digitally) and return.
The funds will be transferred into your nominated business account – this may even happen the same day.
Unfortunately, even the more risk tolerant alternative lenders don’t approve every loan application they receive.
There are many reasons why your application might be declined – for example if your credit rating isn’t high enough for that particular lender, if your income is too dependent on a small number of customers, or if the outlook for your market sector is poor.
It could also be that your business is just too new – start-ups find it almost impossible to secure business loans because the risk is so great.
The number one reason applications are declined, though, is simply not having enough free funds to service a loan.
Most lenders will use the ‘five cs’ (character, collateral, capital, conditions and capacity) to assess your creditworthiness, and even if you meet every other criterion with ease, capacity is the one that counts most.
Even if your overall profits are good, cash flow is what really matters – if your income fluctuates because of seasonal sales or slow-paying customers, for example, the lender may believe that you won’t be able to meet all your payments when they fall due.
You could consider applying to another lender with different requirements – but be aware that if you make too many enquiries you could do serious damage to your credit rating, especially if you are unsuccessful.
If you wanted the finance for a discretionary purchase or to pursue a growth opportunity, you may just need to wait until your business is more established and your income more reliable before applying again.
However, if you need funds urgently, or you believe you have a very strong business case for expanding now, you could try seeking alternative types of funding.
- Invoice factoring or a merchant cash advance are a low-risk, debt-free financing option for businesses with the right business model.
- For other businesses, including start-ups, you could consider crowdfunding, peer-to-peer lending, sweat equity or a personal loan to give you the resources you need.
very quick service
