We are experiencing a record low interest rate environment, currently below 2.55% pa. This makes borrowing money cheap and attractive for capital expansion such as a new rental property, capital equipment, buying a new business, funding growth, or consolidating debt.
However, banks are being more restrictive for new lending and looking at each application in depth. We noticed this trend from the banks last year when interest rates dropped below 3%. Since Covid-19 the banks have tightened their lending criteria further. The “new normal” finance application generally requires:
- 2020 financial statements
- 2021 year to date (YTD) management reports
- 2021 cashflow forecasts
- Asking questions about the impact of Covid-19 on the business
Previously the banks were satisfied with the prior year’s financial statements and a YTD management report.
We are still seeing those businesses with a solid asset base, strong cash flow and a detailed application, successful in attaining new lending and emphasis it is important to be well prepared.
Our recommendations
Talk with us early to discuss the purpose of your borrowing. Having a clear plan and communicating this to the bank will make your application more successful.
For example, you want to borrow $200k for a business expansion (to fund an increase in inventory and a new sales manager salary) to expand into a new area. This business expansion goal could be part of your strategic plan, along with a SWOT analysis that supports your business growth. If these supporting documents (purpose of borrowing, strategic plan, SWOT analysis combined with the cashflow forecast) are communicated concisely to the bank, they will understand your business, know what you are trying to achieve and your direction. This also shows that you are organized, well prepared, engaged with a team of professionals, and prevents the bank misunderstanding you. Preparation is key.
Carefully consider short term debt such as credit cards or the business government loan (if you do not need them). The business government loan is interest free however it still needs to be paid back. The bank will consider your serviceability (ability to repay the loan) which includes new lending along with repayments for existing loans. The less debt you have, the stronger both your serviceability and equity position will be for new lending.
Please contact us early if you are looking at borrowing. It can take time to prepare the financial statements, management reports and a cashflow forecast. We can prioritize work with a prompt turnaround. This may also provide an opportunity for any immediate improvements prior to a finance application.
Consider the regional business partners business support services which may give you funding towards all or some of the costs for a cashflow forecast. A cashflow forecast may also allow you to compare different scenarios such as amount borrowed, or repayment duration.
Contact Us
Contact Tim Doyle or Jane Evans today for a no obligation phone call or meeting on 07 823 4980 or contact us. Our office is in Cambridge, NZ, but distance is no problem. We have many international and national clients.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
