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Many New Zealanders Putting Their Business On the House

5 December 2013

Many New Zealanders Putting Their Business On the House

• Almost a third of SME borrowers use mortgages to finance the business
• Further 28% rely on own savings

Many of the almost one in six New Zealand SME owners who plan to borrow to build their business in the near future are “betting the house” on their success, according to the latest MYOB research.

As part of the latest MYOB Business Monitor, researchers explored which finance options SME borrowers are most likely to use over the period to August 2014. After borrowing from a traditional lender such as a bank, the option selected by 63%, redrawing on their mortgage or using home equity (28%) and using personal savings and investments (28%), were the most common sources of business funding. A further 20% were likely to use their credit card.

MYOB New Zealand executive director Scott Gardiner says that while banks remain the preferred source of finance for local operators, many have to rely on their own sources of finance for business investment.

“The lending criteria of the major banks can make it challenging for some businesses to raise capital – especially when they are starting out,” he said.

“Other forms of funding, such as angel investment, just aren’t as common in New Zealand, so business operators have to look at going solo to raise the finance they need to invest in their business. Many are taking the brave step of quite literally betting the family home or life savings on their business.”

Just 3% said they were likely to use angel investors as a source of funding in the next 12 months.

Mr. Gardiner says that while the independent spirit of local SMEs makes using personal finance sources a seemingly logical option for many businesses seeking funding, it is important to recognise the risks involved.

“Backing yourself to this level makes it all the more important to establish good systems for managing cashflow, extending credit and understanding the returns of your investment in areas like stock, plant and equipment. If you are taking all the risk, be doubly sure you make the right investment decisions. And if that finance is coming from a high-interest credit card, have a plan to pay it down as quickly as possible.”

Low levels of finance
The survey revealed SMEs won’t be strongly reliant on finance in the period to August, with just 17% of planning to borrow to support or grow their business. 74% said they didn’t intend to and 10% weren’t sure.

Mid-sized businesses will be more likely to do so. 37% of businesses with 6 – 19 employees intend to borrow to raise finance, compared to 21% of business with 1 – 5 employees and 13% of sole-trader businesses.

Borrowing highest in the regions
20% of business operators outside the main centres expect to borrow money in this time. The highest levels of borrowing will be in the Manawatu-Wanganui region (26%), Hawkes Bay (20%) and the Waikato (19%). In the main centres, business operators in Christchurch were most likely to seek finance (16%), followed by Auckland (14%) and Wellington (13%).

Most borrowing for manufacturing
Of the sectors, businesses in the rural sector were most likely to borrow money for the business (24%), followed by manufacturing and wholesale (20%) and construction and trades (17%).

Mr. Gardiner says while many traditionally rely on borrowing for support through peaks and troughs in the operational cycle, for others it will be a sign of growing confidence that they are prepared to seek finance.

“Business owners have been fairly cautious in the aftermath of the recession – preferring to reinvest profit rather than borrow heavily to invest in growth,” he says. “However, we might expect more businesses to seek finance for growth over the coming years, as the economy improves further and operators see the opportunities of higher levels of national growth.”

“For any business owner, but particularly those who fund growth via home finance, it is a good idea to use reliable business management systems to keep a close watch on debt levels and performance indicators.”

ENDS

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