The campaign to find small business finance in New Zealand starts with developing a business plan. Unless your business is very small, you might not get a clear idea of your financial requirements without a carefully developed business plan.
New Zealand Trade & Industry has a free publication, Planning For Success – a do it yourself kit for developing your own business plan, that will guide you in preparing a detailed business plan. You can obtain a copy of the publication either by downloading it from NZTE Web site or by sending a mail to info@BIZ.org.nz. You can also read the article on Small Business Planning.
Main external sources of small business finance in New Zealand are government, banks, venture capitalists and business angels. All of them would want to see a comprehensive business plan to look at your request.
Your business is financed with two kinds of funds – Equity funds and Debt funds. Equity funds are owners’ funds, brought in originally and profits retained in the business after operations start (losses would reduce the original equity). Debt funds are borrowings from different sources.
Equity is an essential component of small business finance in New Zealand. Unless you bring in some money, either from your savings or by borrowing from your friends and relatives, prospective lenders might feel that you don’t believe in your own business idea. Show them that you are confident about your idea by risking your own money.
Governmental Sources of Finance in New Zealand
For small businesses and new entrepreneurs, government sources of small business finance in New Zealand could prove critical. These entrepreneurs might find it difficult to obtain small business finance through normal channels.
Work and Income New Zealand helps unemployed individuals and others to set up their own businesses, instead of seeking employment. If you are registered with them, you could expect financial support for the initial period when you are establishing your business.
Government assistance is also available for disadvantaged groups like disabled and Maori people, and women. There are also grants for setting up small businesses, technology research and other purposes. These grants are not repayable and hence small business persons would find these invaluable. Go to the Grants and Financial assistance page of BIZ Web site for brief overviews of, and links to, these sources of small business finance in New Zealand.
Loans and Credits
Loans and credits are often the cheapest source of small business finance in New Zealand. There are a number of sources. Banks are the most obvious source. You approach a local bank with your business plan. It is quite possible that a request declined by one bank might be found acceptable by another bank. However, a professional presentation is important. See the article on Small Business Funding for learning how to present your proposal and how it is evaluated by lenders.
Banks provide different kinds of loans. There are long term loans for acquiring long term assets. And bank overdrafts for fluctuating working capital needs. You could also get short term loans for exploiting business opportunities, such as a Christmas sale. In general, banks require security in the form of business assets or mortgage of property.
There are financing institutions other than banks which could provide loans to you. You could get a list of banks and financial instituions from Sources of Capital ->Debt Providers page. Some lenders might provide finance against your sales invoices.
Another source of finance is suppliers’ credit. Once you have established a business relationship with a supplier, you might get a month or so for paying your bills. That means you could use materials to earn revenue and then pay the suppliers. However, such credit could be offset by the credit you yourself might have to extend to your customers.
Yet another important source of small business finance in New Zealand is leasing or hire purchase. Instead of buying long term assets outright, you could lease or hire them. You would then pay only a much smaller amount to get to use the assets. However, you would have to pay lease instalments regularly for a long period.
Angels and Venture Capitalists
When we mentioned about equity above, we saw it as owners’ funds. However, there is a source, other than the owner promoters, for equity funds. Angel businessmen and venture capital companies invest in equity and are thus sources of small business finance in New Zealand.
Angel investors are wealthy persons who are looking for profitable investment opportunities. Venture capitalists also provide such funds, but in a more organised manner. Both these groups of investors are looking for projects with high growth potential.
If yours is an innovative project with few competitors, you could charge higher prices and earn greater profits. Your business might also have the potential to grow fast before competitors enter the field. Equity investors are looking for such high profit, high growth potential projects.
You would find an Equity providers page at the Ministry of Economic Development Sources of Capital section. The same section has a Referral and Matchmakers page where you would find facilitators who would introduce you to suitable investors or lenders.
Presenting Your Loan Proposal
To tap loan funds that constitute an important source of small business finance in New Zealand, you must present your loan proposal in an acceptable manner. Lenders want to be as certain as possible that the loan would be repaid. This depends on a number of factors such as:
- The profitability of the business,
- The cash flow patterns and budgets, and
- The mental attitude of the borrower.
Profitability depends on the management capabilities of the business. Lenders try to assess these by looking at the background and commitment of the team in charge of the business. They also look at how well you know your business, as evident from the business plan prepared by you.
They also look at the cash flow estimates prepared by you. These estimates must clearly bring out how much money you need and for what purposes. If well-prepared, the estimates will indicate the amount and timings of affordable loan repayment instalments.
Lenders will also check what fallback options you have to meet shortfalls in projected sales and other adverse factors. Nobody can predict the future accurately and so adverse contingencies must be provided for. Bankers themselves provide for such contingencies by asking you to provide collateral security for the loan. Be prepared to indicate what collateral you would be providing.
Above all, lenders will look for evidence that you have honoured repayment commitments in the past. If you have any evidence to show that you are regular in meeting your liabilities, you should include these in your presentation.