With economic commentators forecasting that by 2025, 50% of all NZ’s GDP will come out of the Golden Triangle, the future is looking bright for Waikato business growth. Access to capital is key to enabling growth, but with “stress tested” business interest rates rising in the first quarter this year, securing finance to realise the growth potential may be about to get even harder.
What many business owners are unaware of when applying for funding with banks, is that often a ‘stress tested’ interest rate is applied when considering applications. Stress tested interest rates are above market interest rates and in some cases up to 7.8% meaning that while businesses own lending calculations make financial sense, in the Banks calculations, they potentially don’t.
Quentin Glover, Director of Profinance in Cambridge says it’s an interesting dynamic in the market, particularly in light of economic growth forecasts.
“If the Reserve Bank tries to stimulate the economy, but the Banks are operating their own independent models, there’s a chance that nothing could happen. The Reserve Bank could rev the engine all it wants, but the car might not go anywhere.”
The stress-tested interest rate model was established following the Reserve Bank’s introduction of the Responsible Lending Code in 2015, on the back of the global financial crisis. One purpose of the Code was to stop targeted and predatory lending undertaken by 2nd and 3rd tier lending companies. While the Code stated all lenders must operate with skill, care & diligence, it did not offer a prescription to lenders as to what that might look like. As a result, banks have developed their own models.
“It makes sense that Banks do use a higher Interest rate than the current market rates – interest rates are currently at their lowest since world war 2 and its logical that rates will increase at some stage” said Glover.
As well as looking to banks, Glover says there are often more options available to business owners than they realise.
“The challenge is finding those options and knowing how to make them work. In the Business market all lenders are different and want different things, it’s about understanding what you bring to the table and how to use that to get what you need from the lender” he said.
“Lenders are busy, so for the best chance of success, it’s about presenting information concisely, and in a way that lenders understand and can process efficiently”.
In the past 12 months Profinance has successfully secured finance for the majority of its clients, and with a client base of predominantly Waikato businesses, that’s an endorsement that local businesses are stepping up to maximize the forecast growth opportunities.
“Despite the challenges many of our clients have faced with the mainstream lending model, we’re finding a way through, and from what we can see, we’re confident that the regional growth will happen – it may just take a bit of looking outside the box to get businesses the support they need to kick into that next gear” he said.