News } TBK Capital

Finance for businesses

At the moment one could not be criticised for concluding that the New Zealand Capital Markets are failing to accommodate the financial needs of businesses in an open and transparent manner.

Date Created: 26/11/2020

At the moment one could not be criticised for concluding that the New Zealand Capital Markets are failing to accommodate the financial needs of businesses in an open and transparent manner.    
 
Businesses and particularly SMEs, are being driven to the new high cost Fintech operators for “so called” unsecured working capital and funding, without knowing the true cost of the facilities and the detrimental effect these facilities could have on the long term stability of their business.
 
This creates three serious issues for consideration:

1. The high interest rates that are being charged even in these times, are not sustainable for any business. Rates recorded in the high 40.00% p.a. are considered the “norm” and in many cases upwards of 100.00% p.a. in some examples we are aware of.
2. Without a transparent and true rate of interest and cost of credit being provided, borrowers are being misled as to the true cost of borrowing and the ability to compare on an equal basis other market options.  
3. Although not illegal, due to a loophole in the legislation, borrowers are being misled as to the true cost of credit with providers quoting flat rates of interest; or in some cases no rate at all; just a monthly payment sum.

The other issue - and perhaps more important in the long term - is why are businesses and particularly SMEs having to resort to such high cost lending; and is there a solution?
 
The problem
 
The prime provider of loans, which in most cases is a commercial trading bank, is often not maximising the security offered by the business. That security is usually a GSA over the business, but having to be supported by a mortgage over the proprietor’s house, which if not available generally results in no loan.
 
Usually banks will lend up to an 80% LVR on any dwelling allowing any surplus funds to be used for the business. However this is often at a premium above the mortgage interest rate. One could not be criticised for thinking this could be seen as opportunistic. The security is the house, not the business, so why increase the interest rate if the funds are used for other than the house?
 
So this often results in the bank holding all the business’s - and its proprietor’s - assets as security, yet on many occasions only lending up to 25% to 35% on the GSA asset base that’s given as the security, whether supported by a mortgage or not.
 
The business is snookered as the bank holds all the security, yet will not lend to the full capacity that the assets support. Accordingly it has nowhere to go other than the high cost unsecured lenders.
 
A solution
 
For businesses offering credit to their customers, we can facilitate the restructure of the same securities offered by the borrower to the provider (usually a bank) in a way that will increase the LVR flexibility on both mortgage/house and GSA type loans to businesses in the form of a loan or overdraft. This can be up to 80% of the value of its current assets including customer invoices, which are provided to the lender as security. This delivers a increase in borrowings from the usual 25% to 35% offered by the bank as an overdraft or loan, which uses the same assets secured via the GSA.
 
Increasing the loan/overdraft in this way offers a significant increase in funding. And depending on the size of the business, could represent tens and even hundreds of thousands of dollars extra.
 
Interest rates would be at least compatible to those that the borrower is now paying, as there will be:

• No 2% to 5% premium if surplus mortgage funds are directed to the business by the house and business owner.  
• No need to change banks, unless required or you wish to do so, hence maintaining credit cards and all other personal bank business remains intact.
• The GSA facility grows with your business requirements thus keeping in step with business growth without the need to seek constant bank approval for increasing facilities.

.............................................................................................................................................................................................................
Any reference above to investment is not an offer of financial products that requires disclosure under the Financial Markets Conduct Act 2013 (Act) and is available only to wholesale investors as defined by that Act. It is intended for distribution only to selected people to whom, under the relevant laws, it can be lawfully distributed. It cannot be distributed in any other jurisdiction, or to any other people. It is not an offer or solicitations in any jurisdiction in which such offers or solicitations are not authorised, or in which the person making such offers or solicitations are not qualified to do so, or to any person to whom it is unlawful to make such offers or solicitations. Any representation to the contrary would be unlawful. No action has been taken by any person that would permit a public offering in any jurisdiction where action for that purpose would be required.

Cheers



John Paine B.Sc., Dip BIA
TBK Capital Limited
Level 10, 120 Albert Street
Auckland 1010, New Zealand
Phone +64 9 307 3257
Mobile +64 21 902 901
Email john.paine@tbkcapital.co.nz