The changing environment for borrowing

The working capital businesses require to pay for their day-to-day operations is, in the words of one business leader, “getting chewed up” by slow payments and reduced incomes, forcing more enterprises to seek outside finance to stay afloat.

As well as these ‘of necessity’ borrowers, there are still businesses who see in the downturn opportunities for expansion and are willing to take on debt to make sure the opportunities are not missed.

All predictions are that the necessity borrowers will progressively further outnumber the opportunity takers.

But at the moment there is no evidence that banks (by far the largest source of business borrowings) are lending significantly less.

Latest Reserve Bank figures show that bank lending has peaked, with a fall in January 2009.

However, overall bank lending increased more than 16 percent during the 12 months to the end of January.

And at least two of the main banks have said they don’t expect to be lending less to businesses in 2009.

A Business New Zealand survey, carried out in February as one preparation for the government’s Job Summit, showed less than 10 percent of respondents believed they had been on the receiving end of an unjustifiable rejection of an application for debt financing or a credit injection.

“It indicates that banks and other financial institutions are still seeking to lend, but that more stringent conditions are being attached,“ says Business NZ chief executive Phil O’Reilly.

“It may also indicate more businesses are self-regulating and making fewer approaches for finance in the light of current economic conditions.”

One experienced finance industry observer said “bank managers are probably now getting, say, 20 loan applications – including overdraft facilities – where they used to get 10. They probably still only approve five.”

The Reserve Bank expects overall business lending to slow on the back of tougher credit as financial institutions ‘deleverage’ by raising capital, selling assets and restricting new lending.

On the demand side, the National Banks’ February 2009 Business Outlook shows business investment intentions are the second lowest on record.

A net 15.4 percent of survey respondents expect to cut investment over the coming year.

A lender’s reaction to potential borrowers depends on a number of factors: how long you have been in business (if you are pitching for a start-up it will be tough while a strong track record will go a long way to making potential lenders feel more comfortable); size (it may be easier to get $10,000 than $10 million); what industry you are in (property is tough, however, if you’ve got an IT product that’s scalable and reduces business costs, you’ll get attention) and the quality of your business plan.

Banks

Banks say they are “open for business”, but it’s not business as usual.

Falling asset values and income won’t necessarily result in bank managers rejecting loan applications, but they do expect businesses to be structured and operating in a way that reflects the economic reality.