Business Loans

Affordable & flexible business finance in New Zealand

Obtaining affordable business finance is a priority for every entrepreneur.

The question is how to do it. Find the answer to this and other major questions regarding business loans below.

How to Obtain Business Finance

Here you will find out whether applying for the traditional forms of finance is the best option. You will learn more about the challenges associated with obtaining business finance in New Zealand. You will find essential advice on how to apply for finance and boost your chances of approval. You will receive advice on business finance management as well. This guide is helpful to existing business owners as well as to new entrepreneurs. If you have an established business, you will learn whether and how using a loan can help you resolve current issues.

Business Loans for New & Established Businesses

Why do you need a loan? If your business is experiencing operational problems such as low productivity or insufficiently high price markup, obtaining additional finance will most certainly not be a useful solution. In addition to the existing issues, you will have to worry about debt repayment. Furthermore, lenders will evaluate your business thoroughly when you apply for a loan and will not approve you if they identify problems.

How fast is your growth? If you want to finance the growth of your business, you have to prepare a long-term plan which to present to lenders. It has to focus on productivity and profit margins. Without a plan, your chances of approval will be close to zero. The other major prerequisite for obtaining finance is for you to invest in the growth of your business as well. This will make any lender more willing to provide support.

Is it the right time for getting a loan? If you are experiencing an urgent need for cash because of pressing financial problems, then your business is most likely unable to qualify for a loan. Lenders focus extensively on risk evaluation and are traditionally risk-averse. That is why they tend to approve finance-only companies which follow their business plan strictly, have steady revenue and profit and enjoy sufficiently large safety margins. It may take up to 3 months from the date of the loan application for a business to actually receive cash.

Business Loans for New Businesses

What is the optimal loan size? You have to present an exact figure based on planning and calculations when you apply for a business loan. The lender would like to know exactly how much you need to borrow. If you are not prepared to provide a number, then you will most certainly not get approved.

What will you use the loan for? In order to qualify for a business loan, you have to produce a precise plan for its utilisation. You have to answer several important questions. How will you use the money? When will you use it? How will you use the product that you invest in? What are the planned returns on the investment? The plan can assist you with finding alternative finance option and with saving as well. If you intend to purchase equipment, you can lease it or share it. If you need money for managing your cash flow, you can work out a favourable payment schedule with your suppliers.

Business Finance in New Zealand

Taking out a business loan in New Zealand is not as easy, fast and simple as many new entrepreneurs would like to think. The application process is lengthy with lenders requiring you to present a large number of documents and various details. Another factor which makes obtaining business finance challenging is the unwillingness of lenders to assume higher risk. They extend loans only to businesses that have the lowest possible risk of default. Unfortunately, most of the small, micro and medium enterprises are considered to be at high risk of default. This, however, does not mean that it is impossible to obtain finance. There are ways in which the hurdles set by lenders can be overcome. Find out what these are.

Placing collateral - When you place an asset as collateral your business loan will be secured. The risk for the lender will be lower since they will be able to repossess the asset in case you default on the repayment of your debt. Any asset of value can be placed as collateral. Some of the most widely used assets include buildings, machines, savings accounts, financial instruments and complete investment portfolios. A personal asset can be used as collateral, but in this case, the risk for the entrepreneur is much higher. Another important thing to note is that the value of the collateral must be sufficiently high to offset the risk that the lender assumes. The smaller the business is the riskier it is. Hence it will need a more valuable asset as collateral. The problem comes from the fact that smaller companies have smaller assets.

Preparing for delays - Business loans in New Zealand are not very fast to obtain. The lender may need up to 2 months to assess your application. Upon approval, you may have another month before you receive the money in your account. The whole process can take up to 3 months. It pays off to adjust your business plan in line with this lengthy process.

Credit polishing - The lender will check your credit record when you apply for a business loan. Unless your credit history is perfectly clean, your application will most certainly get rejected. That is why you need to do everything necessary to fix any issues. You have to repay any past debt straight away. You should request for credit record errors to be corrected as well. Instead of trying to hide past delinquencies, you have to explain the situation and your position and present measures which you have taken for preventing future problems.

Important Advice for Obtaining a Business Loan

1. Be persistent

It is difficult, but not impossible to obtain business finance. Use your knowledge and creativity and expert assistance and advice for reaching your goal.

2. Try family finance

Many entrepreneurs in New Zealand and around the globe start their businesses with the support of friends and family. You can obtain the required finance and then pay them back from the profit which you make. Once your business has a solid position, you can turn to finance to banks and financial companies. Even if you borrow money from a traditional lender for financing your new venture, you may still have to rely on a friend or a family member to be your co-signer. If you decide to obtain finance from family and friends, you have to prepare professional loan agreements with clear terms and conditions.

3. Apply for a loan

You may have a low chance of qualifying, but if you do not apply, you will not have any. That is why you should make an attempt.

4. Apply to a number of different lenders

When you apply to two or more lenders at the same time, you will have better chances of getting approved.

5. Support your application with your business plan

You need a detailed business plan which is well-written, easy to follow through and clear to understand. You should be able to present it in detail and answer questions.

6. Come up with a precise loan amount & support it

You have to explain how much money you will need and how you plan to use it. You also have to present an estimate of the returns which the investment will generate. Applications for smaller loan amounts have higher chances of approval.

7. Be prepared to wait

You have to take into account the possibility of lengthy application processing and make your plans more flexible.

8. Keep working while waiting

You should exploit every possible opportunity for obtaining business finance while waiting for loan approval. You should focus on equity building as well. As your business grows, becomes more stable and generates more wealth, your chances of getting a business loan will improve.

9. Go slowly

You may have a brilliant idea and a bold plan for taking the market by storm, but no traditional lender will provide finance since you do not have any net worth to back it up. For this reason, you should start small and downsize your loan requirements to boost your chances of approval.

10. Bid for a contract only after securing finance

This will support your bid and help you to have a head start. If you have got a contract, but you do not have finance, you should look for alternative solutions. One option is to partner with a competitor so that you can meet your contract obligations. You will have to share the profit, but you will have well-established positions for earning contracts and for securing loans in the future.

11. Use negotiation

You can gain more freedom and make things easier for your business if you work out flexible ways for payment with your suppliers and clients. Request a longer payment term from your suppliers. You will certainly get a positive reply if you have been a reliable payee and have established a personal relationship with them. Similarly, you can negotiate with clients to pay a deposit and instalment payments as the work on the project progresses.

12. Focus on cooperation

You can work together with other businesses in a way which is beneficial for everyone. You can share equipment and facilities, combine your efforts and share the profit in the end.

Where to find Business Loan Lenders in New Zealand

Traditional Banks

Commercial banks in New Zealand have business loans available to small businesses. However, since these companies are considered to be highly risky, they rarely qualify for the available finance. There is yet another reason why banks prefer to work with bigger and more well-established businesses. The loans, which lenders grant to larger companies, are more profitable simply due to their greater size. Since banks have to incur more or less the same cost for processing applications for small and large loans, they profit more from the latter. The higher risk and lower profitability are good reasons for banks to reject your application, but you still have your chances so you should give it a try.

Asset Finance Houses

These lenders can be independent, but they are usually part of the big bank groups. Small and starting businesses have higher chances of getting a loan for them for two reasons. Firstly, the loan amounts are smaller. Secondly, since these lenders provide finance for the purchase of an asset, the asset serves as collateral and the loan becomes secured. A secured loan is less risky for the lender, but riskier for the borrower since the asset can be repossessed in case of default.

Specialty Lenders

There are lenders which specialise solely in the provision of small business loans. They can be divided into two groups.

Companies providing loans directly

These companies operate like traditional lenders, but they are willing to accept higher-risk borrowers including ones with bad credit record. They are much more likely to provide finance to small and newly established businesses with smaller and less valuable assets. The easier access to credit comes at a higher price, however. The loans provided by these lenders typically have higher interest rates and fees. There are both private and government-backed lenders in this category.

Organisations making business loans more easily accessible

These organisations typically guarantee a portion of the loan which you take out, while you are responsible for backing the remainder with an asset which you place as collateral. Some can cover the lender's cost for processing your loan application. The organisations in this group provide assistance to businesses with finance management and loan repayment as well.

Venture Capital Funds

Venture capitalists do not provide loans. They invest in the business. The return on their investment is a share of the future profit. They typically aim for a return on investment higher than 30%.

In order to invest in a company, a venture capitalist will require taking a board-level position for the purpose of assuming some level of control over the operations. Most investors will sell their shares in the company in a period from 3 to 7 years. The shares are sold either to another investor or to the owner of the business. This option for getting cash for a business is attractive, but given the high return on the investment required by venture capitalists, it is inaccessible to many small and starting companies.

Government grants are available to businesses in New Zealand as well.