Money Matters

Much has changed in the world of business finance. Lenders have become more flexible, more involved with their clients – and the options for growth finance more extensive than ever. Patricia Moore reports.

With cashflow management still one of the biggest issues facing SMEs, establishing sustainable ways to improve it is key to growing a business.
But funding is often a distraction for business owners, says Heartland Bank head of business, Will Purvis. “There’s a perception that it diverts attention away from the real job of growing turnover, increasing margins, ensuring the business is operationally efficient, and that customer and supplier relationships receive the time they deserve.
“The right finance is at the heart of all this and getting it right will help, not hinder, a business,” he says.
But what’s ‘right’ in a market where business owners have become all too aware that the only certainty is uncertainty?
“The GFC has made [business owners] more aware of the difficulties they may face in sourcing funding for growth, and that they are affected by the global environment far more than they had appreciated in the past,” says Fred Ohlsson, ANZ Business Banking’s managing director. “As a result I think businesses generally now understand the trade-off around the need to balance risk and to ensure that growth is adequately funded.
“Businesses now work more closely with a lot of their support networks, including banks, accountants and other advisors to ensure they manage their finances to allow for possible tightening of funds, and potentially increased cost, due to lack of global cash moving around the system.”
David Blakey, head of corporate and specialised finance at BNZ, echoes these comments. “Finance is no longer being seen by providers or businesses as a ‘set and forget’ function. It’s now viewed as a long-term relationship between the finance provider and a business. “Business owners now recognise the value banks have invested in their businesses and view them as a stakeholder, which leads to a more open relationship with more exchange of information.”
Borrowers are a lot more risk averse and largely only take on debt when confidence is high that the debt will generate current or future income, Blakey says.
Banks have traditionally been the go-to source of finance for business owners with property assets used as security. Indeed a significant component of SME lending is based on residential security and ties the family assets into the business, says Purvis.
But there are a greater range of options available today and many business owners are choosing not to use the family home as security.
“Heartland’s approach is to finance the business based on the strength of its assets and balance sheet, as opposed to the owner’s personal assets,” explains Purvis. “With Asset Finance and Invoice Finance we have the products and the expertise.”

Eye-opening solutions
Debtor finance solutions, such as invoice discounting, are gaining traction. John Blackmore, Bibby Financial Services national sales manager, says with banks entering this space “it’s opening the eyes of advisors and SMEs alike to this type of solution.”
With invoice discounting, all but a small percentage of the value of the invoice is paid to a business when the customer is invoiced. The remainder, less a small service fee, is received when the invoice is paid. Typically, invoice discounting, unlike factoring, is confidential; debtors do not know debts are being financed.
“SMEs that access these solutions are ordinarily entities which have a sound financial track record with good operating systems,” says Blackmore. “For smart entrepreneurs, debtor finance is a flexible and cost-effective way to provide working capital while ensuring residential and commercial property remains unencumbered.” A business is able to take advantage of opportunities a cash strapped enterprise may struggle with, he says.
Lock Finance offers a range of fully integrated funding options, including working capital, trade finance, debtor finance and factoring. Craig Brown, GM Lending, says such products could have helped businesses caught up in the recent Mainzeal receivership. Regardless of the amount owed, as unsecured creditors those businesses are at the bottom of the chain, says Brown. “The level to which they are affected will be determined by the support they receive from their funders.
“Lock Finance can generally provide a higher level of funding against the client’s receivables ledger than banks can offer. This can allow additional funding for the client to ride out the probable shortfall in cash from non-payment of any completed work.”
But Brown says there’s still a way to go when it comes to understanding the benefits of funding packages against firm purchase orders and a business’ debtors.
“New Zealand business owners need to be open to other forms of financing so that their businesses can achieve the level of growth they wish.”

Show us your business plan
Attracting funding is more likely with a solid business plan that’s been regularly updated and good business systems with a proven track record of achievement, says Ohlsson. “Lenders will also be looking to see that you have a strong team with a spread of experience, strong management skills and good business skills. It’s not enough to have a good idea; you must also have the people in place to make the idea work.”
Thorough research is important, says Ohlsson; is there sufficient demand and a sustainable market? Is the potential market big enough? What about growth potential? Is the business operating in a mature industry or an emerging one? “You should have answers, to all these questions and be ready to spell out your key points of difference or your unique selling point.”
Many small firms in New Zealand are undercapitalised and struggle to find funds to invest in growing the business but additional finance isn’t always the answer says Ohlsson. Refreshing marketing material, improving your web presence, harnessing technology, improving customer service and testing new products can all have a positive influence on growth and don’t require a lot of money.

Send me an angel
Angel investors offer another source of finance; and awareness and interest in this sector is growing, says Suse Reynolds, executive director of the Angel Association of NZ.
“Angel investors bring not just capital but connections, expertise and experience to a venture.”
Angels are interested in a wide range of products and enterprises, says Reynolds. “The common factor is that the business has to be able to scale; there needs to be the potential for the business to grow very quickly and capture a large market.”
“Private equity and venture capital firms are looking for successful management teams with a clear understanding of the market opportunity and an executable growth strategy,” says Colin McKinnon, executive director of The New Zealand Venture Capital Association.
“Generally investment transactions over $5 million are necessary to interest private equity although venture capital funds could be attracted to smaller initial investments.”
Investors generally back management teams with successful track records and business owners often miss the opportunity to attract investment due to poor business structure or governance. “Growing privately-held businesses requires the owner to be asking ‘what will the next investor expect?’, then, getting those structures in place, ahead of asking for investment,” says McKinnon.

Change the only certainty
These uncertain times mean finance providers look for the ability to understand and respond to change, says BNZ’s David Blakey. “That translates as knowing what could change, understanding what that means to your business and knowing what you will do if the change occurred. Such changes could be anything from an increase in interest rates or change in the exchange rate through to possibilities such as a major debtor defaulting,” he says.
“As a bank we don’t want to hear the rosy picture; we feel more comfortable knowing that business owners have considered good and bad scenarios and what they mean for their operations.” That, he says, requires a certain level of trust between a finance provider and a business as those ‘what if?’ conversations take place.

Patricia Moore is an Auckland-based freelance writer. [email protected]

Be better prepared
The Government is focused on growing New Zealand’s expertise in the innovation area, and there are numerous grants available to aspiring companies, but sourcing the necessary capital can still be a stumbling block, says Max Morley. And, he says, with New Zealand’s investor pool becoming more selective about the companies in which they invest, more budding entrepreneurs are being forced to look offshore for capital. “What that effectively does is transfer partial ownership of the IP to the offshore investor, instead of retaining it here where it should be.”
Capital raising is an important aspect of their business at Max Morley and Associates, “putting ideas and investors in touch”, and Morley says a lot of their work is around strengthening a company before it goes to the investment market. “The better prepared you are, the better you understand your value proposition; the better prepared the five year forecasts and business case, the more likely potential investors will see the value around any money they may put in.
“Too often businesses requiring capital go into these discussions with a poorly prepared case.” Potential investors tend to make up their minds within the first five to ten minutes of reading a proposal, he says. “They’ll know very early in the piece whether or not it actually fits. I’ve seen a number remove themselves without even going into the financials because the intrinsic value hasn’t been sufficiently articulated to capture them.”
Having someone on board who can clearly express the value proposition and support it by a business case the investor will look at is essential, says Morley.
The bank to thank
Like a good many people in business today, Nic Paterson has the bank to thank. As a young guy still completing a commerce degree, he identified a business opportunity in the sector where he’d pumped petrol part-time since he was 15, worked out the numbers with an accountant and talked to the bank.
Did he go armed with a business plan?
“Knowing what a business plan looks like today, I’d have to say no. But we had good numbers.” His parents were prepared to guarantee the loan and the bank said yes.
Back then – and we’re talking the 90s – that was about as involved as the bank got. It’s a different story today, he says. “We’re in contact with the bank, BNZ, two or three times a week because there’s just so much going on in the business. We keep growing and they need to be fully aware of what’s happening. They’re a massive part of my team; a fantastic group of guys who really want to be involved with the business. We’re throwing things at them and they’re giving us ideas.”
Paterson’s company, Star Metro group, owns and operates service stations across Auckland and the Bay of Plenty, many where their Fix convenience stores and Subway outlets also operate.
He started slowly with just the one site for the first few years, mastering everything he needed to know about being in business. “PAYE, GST, staff, what banks want in business plans; I had my ears open, learning all the time.”
One of the things he learned is that there are always options when it comes to funding business growth. “There have been times when I’ve thought something was a really good idea but the bank said no. That doesn’t mean you stop working on the project. There’s someone out there who’ll be interested.” He also says if you don’t feel your business banker is a good fit, get the necessary changes organised.
And, he says, growing a business isn’t always about money. “The business has grown a lot as a result of me doing the ICEHOUSE owner manager programme. Banks view clients differently when they’re prepared to grow themselves as well as the business.”