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How SMEs are funded

Posted 9 years ago in Xero news by Rod Drury
Posted by Rod Drury

Interesting article one of our team noticed in the Independent last week.


It quotes Alisdair Thompson, who made this very point when I co-presented with him a couple of weeks ago. I was glad to see it in print (though can’t find a link) as it struck me as insightful.

10 years ago, 10% of SMEs were funded by direct business loans. Today that figure has dropped to between 3% to 5%.

The rest finance their business by a mortgage over their house.

Banks generally cannot provide figures on how many house loans finance business, because they didn’t formally differentiate the lending when the house market was running hot.

This is the reality of small business. Very few businesses have a loan that is secured on the assets of the business. Effectively it is secured over the business owners house or with a personal guarantee. This is what makes small business so different from big business – it really is personal. If that deal doesn’t come in you have to face your CFO across the pillow at night and explain that the bank now owns another room of your house.

It also reveals why it is so hard for young entrepreneurs to get started. Without having a chunk of equity in your own house or having a close relative provide a Personal Guarantee it will be very difficult to obtain any sort of funding.

When we did AfterMail we soon worked out that as you grow you need cash – not for investment, just to fund cashflow.  Say your business costs $50k a month to run, and you get your sales up to $50k a month. Home and hosed right?  Well no. Your sales invoice might get approved for payment after a month because you’re in an implementation phase, and it might take another month for you to get paid.  So you need 2 months cash ($100k) just to stay alive.  Without an overdraft you need to raise that $100k as equity or you are forced to slow growth down to build your reserves.

It makes my blood boil when I see bureaucrats delaying projects or holding onto payments. They do not understand the stress it places on entrepreneurs who are risking it all and sweating how to make payroll.

Cash is oxygen. Small amounts of credit allow the entrepreneur to fund growth. It would be very interesting to know how many small businesses are funded by their home loan. I suspect it would be over 90%.


Asantha Wijeyeratne
October 12, 2009 at 12.37 pm

This is the biggest hurdle SME’s in NZ face. From all our conversations with thousands of SME’s we estimate that less than 5% of SME’s get loans from the banks without having to put the house on the line. The banks don’t need to asses the risk of the lending as long as there is adequate equity, so poor businesses get funded. I personally had to put the house on the line to start SmartPayroll and fully appreciate the position that the majority of businesses in NZ face. Its madness when you have to cut back on growing your business because you can’t fund the growth!

October 12, 2009 at 2.00 pm

I am so glad that at least someone gets it. My wife and I own a fast growing company in Auckland. In the last 6 months we have gone from just the two of us working out of our spare bedroom to 6 employees, office space and all the fun overheads that go with it. 4 months ago we went to our bank with clear projections o cash flow problems we were going to face over the coming months. Knowing we wouldn’t be able get overdraft we were after without guaranteeing it, we tried to use our house, which the current mortgage was with the same bank. We were told they couldn’t do anything. We tried to preserver, even turning away a small amount of work due to cashflow concerns. In the end we have had to sell our house to get the capital to fund the expansion, but not before we had started fighting the wolves from the door.

Unfortunately banks are far too short term focused, as know our bank has lost the long term income of our mortgage, credit card and any loyalty we may have had for them.

February 15, 2010 at 2.33 pm

Banks have had a holiday from doing any hard work for the past few decades. A majority of their profits are made from the residential property market and todays bankers are glorified typists, they type-in data supplied on mortgage application forms, and a computer program takes care of the rest.

With a steady stream of anxious first home buyers and cashed up property investors, the banks have had it pretty sweet!! There’s been lots of demand for housing which sustains demand for mortgages. That demand has steadily increased house prices, so each year the value of mortgages issued increases too. On the back of rising house prices, banks could issue the same quantity of mortgages each year and still attain growth. Banks don’t need extra mortgage business so they can be discrete about who they lend to, and in the comfort of the housing market they certainly don’t need to lend to SME’s.

Now with property tax law changes on the horizon, there are going to be fewer cashed up buyers competing with first home buyers. Fewer buyers means less demand for property. Less demand for property means house prices could fall, and once house prices start falling, there’ll be more property investors wanting out. Less demand for property means less demand for banks traditional bricks and mortar mortgages, falling house prices means lower valued mortgages, and all that adds up to diminishing revenue and profits for banks.

Diminishing profits and revenue for banks is a game changing event, and if that were to happen, banks will have two options, downscale, or diversify. If the choose the latter you may well be getting a knock on your door from your “friendly” business banker, and I hope those of you who have sought business loans in the past and had the door slammed in your faces, tell them to take a hike!

Richard Seager
February 16, 2010 at 6.36 pm

This is not just a NZ problem. We’ve been in business for 20 years or so now and I suspect we’d still have a problem getting finance. We did manage to get some pure business finance once though so never give up!

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