New approach to bank lending

Photo / Getty.

New way of funding business could spur growth.

New Zealand's tech sector - the country's third largest export earner - is being given a major boost through a capital lending initiative in a sector traditionally considered a no-go by the banking industry.

Last year's $4.5 million buy-out of Run the Red by New Zealand messaging service company Modica Group - made possible through Bank of New Zealand funding - marks an unprecedented move by the bank to lend to tech businesses with no real tangible assets.

Tim Wixon, a BNZ Commercial Partner who spearheaded the deal, says the move is a pioneering step and a whole new approach for funding of high growth business in New Zealand.

"Lending against cash flow is not a new concept," he says, "but funding against cash flow in a tech business is." Enabling the purchase of one tech company by another (the Modica - Run the Red deal) without asset backing is a landmark transaction.

"This has not traditionally been the domain of banks and in our experience most tech businesses themselves would not even think about approaching a bank for their funding needs."

Wixon says the government's focus on the tech sector as part of its strategy to grow New Zealand exports means it makes sense for the BNZ take a lead on supporting the industry.
The NZTech (New Zealand Technology Industry Association) annual report shows the tech sector is a significant player in the New Zealand economy.

Not only is it the third largest export sector (last year it exported $6.3b worth of goods and services or nine per cent of the total), it contributes $16.2b to the gross domestic product (GDP) or eight per cent of the total.

There are more than 28,000 tech sector firms operating in the country employing almost 100,000 people. The report says the sector also has on average higher paid and better qualified employees than all other industry sectors.

"It is well known that the tech sector represents an enormous opportunity for New Zealand and is a sector where the country can really achieve success on the world stage," says Wixon. "We are seeing so many great ideas with good people in behind, and it would seem to be the sector with the highest export growth potential."

He says Modica is a great example of a high growth tech sector business and is succeeding both domestically and offshore, meaning more employment and income for New Zealand.

Wixon says while tech companies do not face many of the limitations traditional businesses have when expanding overseas (transporting physical products), capital and talent can be major challenges.

"Clearly capital is one area where we may be able to help; but we are constantly evolving and looking at ways to help, such as connecting good people in what is a highly collaborative sector, helping businesses with export opportunities and providing expertise in areas like off-shore cash flows and risk mitigation."

Wixon says if a business doesn't have tangible assets, the bank will look at cash flow and work to understand 'who' is behind the business and 'why' it exists'.

"It is also critical to gain a deep understanding of their revenue model, their customer base, their competitors and in Modica's case, their ability to really scale revenue globally against a fixed costs base using their cloud based platform.

"We make sure we understand the key drivers of the business: the business model, the growth potential, the people, intangible asset protection their advisers and their governance," he says.

"We like seeing the founders playing a key role in the business, and we look at the dynamics of the people involved in the business and those operating it, whether there is that creative spark and healthy debate that drives progress."

Wixon says lending to tech operators or businesses with intangible assets is not unique to New Zealand. He points to Singapore as an example of where its Central Bank appears to be progressive in terms of lending against intangible assets.

However Wixon says he believes there is a key distinction between the concept of straight lending against intangible assets regardless of cashflow and the Modica case, where the BNZ looked at the company's cash flow and revenue model in considerable detail.

Modica's CEO Stuart Wilson says a key component for success was strong cash flow modelling in a language bankers understand.

Modica is aiming to re-define the global intelligent messaging market and has operations in Australia, South-East Asia, the Dominican Republic and the US, and connectivity to every mobile handset globally. Enterprise Messaging Services (EMS) could potentially replace email as the dominant communication method for businesses seeking a faster, more secure and interactive way of reaching everyone from customers to partners.

Its strategy sees it moving away from being just a text message provider into the realm of becoming a 'smart partner' to mobile operators globally.

Already the everyday operations of many enterprises in Australia and New Zealand now heavily rely upon Modica SMS services to secure transactions to customers and other organisations - as well as providing fast, cost effective customer service information on a daily basis.