Hardship as money dries up

Lynley Alderson can't find a bank to lend her money to open a boutique cinema in Pukekohe. Photo / Herald on Sunday

With business lending still on the decline, small to medium enterprises (SMEs) are finding it increasingly difficult to get a loan out of their financiers.

Reserve Bank figures show total business lending has steadily dropped from a peak of $81 billion in December 2008 to $72.8bn in June.

Commentator Bernard Hickey of website Interest.co.nz said that to control their costs the banks were lending only to certain types of customers.

"They're not lending to anyone wanting to start up a new business, expand a business or even fund it off their mortgage."

In the last six weeks the economy had "just had the wind knocked out of it".

The banks were under enormous pressure from the Reserve Bank and their own boards to secure long-term sources of funding and it was still difficult to get hold of money. They were nearing the end of their reporting periods and had to make sure they hit their core funding ratio targets.

However, it had always been the case that the mainstream banks lent to big business or home owners, he said.

"There always has been this dead patch in the middle. New Zealand businesses have to get used to the idea that they will have to grow from equity."

David Newport, principal of business broking firm Switch, said three years ago banks would lend more than three times a business' EBIT (earnings before interest and tax) and in many cases up to 100 per cent of its value. Now they would lend well under twice EBIT and generally less than 50 per cent of the value of the enterprise.

"The banks are definitely very reluctant to lend on any start-up business opportunity," he said.

"Businesses with a verifiable financial track record that are being sold to buyers with a proven business track record are being funded at similar to pre-recessionary levels. If you don't meet this criteria it becomes progressively harder to be able to obtain funding." Some were concentrating on existing customers since it was "better the devil you know".

National Bank's head of business banking Andy Somerville said the bank was lending to SMEs, but those starting up in business would have to find a way to assure the bank, particularly about their ability to service the loan if circumstances changed or cashflow did not meet expectations, he said.

He pointed out some of the decline in total lending to businesses was due to companies reducing their debt levels.

Lending in the non-bank sector has also declined sharply, from $8bn in December 2008 to $6.67bn in June 2010.

Ken Beams, general manager of Nelson Building Society, said it was not having trouble getting loans to existing customers.

Meanwhile, GE Capital's fleet and equipment finance business has grown 20 per cent, local general manager Mitchel Booth pointing to a trend towards reloaning on equipment and sale and leaseback arrangements.

Banks fail to walk the lending talk for start-ups

Lynley Alderson believes there's a market in Pukekohe for a boutique cinema.

The up-and-coming rural town has no cinema at all. "It's developing into quite a wealthy town; there's a lot of lifestyle blocks and things like that."

She's spoken to film distributors and other boutique cinema owners around the country to put together a business plan.

Trouble is, she can't find a bank to lend her the money.

For a couple in their early 30s, she and her husband are well set up. They have three investment properties, cash savings and live in a family-owned property.

Alderson has worked out she will need around $400,000 to establish the business and proposes borrowing against their properties.

However, they are just short of the full amount of equity. The answer from the banks has been a flat "no".

"They said they needed full security for the whole thing.

"It is a reasonably expensive set up so I can understand a little bit of the banks' reluctance but I felt that we were in quite a good position."

The bankers also say a cinema is an unproven business in Pukekohe. "But that was the point, to be the first."

She has tried Westpac once and has been back to both National Bank and BNZ.

She was encouraged to try again by advertisements such as BNZ's "Whale Watch" campaign. "There's been a really big focus on 'come to us with your business'.

"That's what really has annoyed me - all of the ads, both BNZ and National, they imply that they'll help start-up businesses. I just feel like they're almost false advertising."