Even the sweetest little businesses can’t tempt the big bank lenders, despite the Govt pinning its economic recovery hopes on SMEs.
A small Wellington business seeking capital to grow has turned to crowdfunding after the bank repeatedly turned it away.
Chocolate boutique Baron Hasselhoff’s owners are trying to raise $50,000 through Pledge Me after struggling to get a loan from the bank.
Co-owner Erin Todd said the five year old business became profitable for the first time after Covid-19 and revenue had also increased more than 50 per cent to $200,000 over the past year due to strong e-commerce sales.
“They still said no, citing too much debt and not enough profit. Which is true but fairly normal for a small business in growth phase.”
– Erin Todd, Baron Hasselhoff
It had projected to hit $282,000 in revenue by August this year, however Todd said the “Catch 22” was that it wasn’t able to meet its projection without money from the bank.
BNZ rejected a request for a $10,000 loan in August last year, and the business was rejected again when it asked for a $30,000 loan last week, Todd said.
“We went back for the second time and they still said no, citing too much debt and not enough profit. Which is true but fairly normal for a small business in growth phase.”
While BNZ would not comment on the couple’s loan application, the bank’s spokesperson said when making lending decisions it required a range of up-to-date financial information to base our decision on – for example, cashflow analysis and well-supported projections.
“We are prudent lenders and we have obligations to make sure any money we lend out can be sustainably repaid by the customer.”
Research by YouGov, commissioned by small business lending specialist Prospa, earlier this year found small businesses were finding it harder to access funding from banks and other traditional lenders.
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A survey of 200 small businesses found 57 percent of them struggled to get a loan. For younger businesses that had been operating less than five years, this figure was nearly 70 percent.
Wolf and Fox business advisor Toss Grumley said generally if banks were not funding a loan they were unsure of a business’s ability to meet the repayments.
“To assist with getting a loan from the bank a business should ensure it has the cleanest set of books possible,” Grumley said.
“Business owners should avoid doing personal spending through the business as drawings, making any unnecessary purchases and also put a big focus on showing solid cash flow and good profits. Things like using housing as security assist too, but aren’t a must if the business is a strong secure proposition.”
Grumley said the crowdfunding process could be a lot of work especially as businesses had to be willing to make all their business details public.
Baron Hasselhoff’s other co-owner, Clayton McErlane, said the $50,000 would go towards a new machine to ramp up production of its ethically sourced cacao chocolate bars, a new fridge, molds and to hire more staff. The new machinery would relieve the couple of cutting chocolate by hand – a laborious task that took about four hours every day.
McErlane left a 20 year career in hospitality to start the chocolate company. He previously worked as a chef at Christchurch’s The George Hotel and Tākaka’s Dangerous Kitchen.
Todd joined the company last year full time to help with marketing and sales after she was made redundant from her job in event planning.
While Baron Hasselhoff chocolates were selling at some specialty grocery stores like Farro in Wellington, the couple hoped to scale up and sell through the major supermarkets as well.
Lending in real time
Australian fintech Prospa has been lending to small businesses for about eight years. The non-bank lender launched in New Zealand two years ago.
Its general manager Adrienne Church said banks were mainly focused on mortgages and personal finance through Covid-19, not on lending to small businesses.
“Which is surprising because small businesses are the core of the economy,” Church said.
Church said the number one concern for businesses was not having quick access to capital. A number of businesses could have been saved from collapse after the GFC if they had access to capital.
Prospa hedged its losses with real time data analysis of a business’ finances, she said, which determined how much it could afford to lend. It also based its decision on the business’ performance three to six months before applying for the loan.
She said on average, small business loans were worth about $45,000 in the first quarter of this year, about $10,000 more than the same time last year. She said the average loan term was about 14 months.
Prospa, along with a number of banks, is backed up by the government’s business finance guarantees scheme.
But economist Brad Olsen said only about a third of the scheme had been utilised. Banks were more cautious about lending to avoid overextending themselves due to the nature of the pandemic, he said.
“Given how abruptly the virus can reappear in the community, there’s a pretty good case for banks to be more cautious,” Olsen said.
For the time being, Todd and McErlane were hopeful their fans and the community will help them survive another uncertain year.
The company was a favourite for Christmas gifting last year, so much so that it ran out of product.
With four days left to their crowdfunding, the company has already raised $37,000.