• Business Finance

Business Lending in 2022 – Is it too hard?

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Business financing and access to start up business loans in New Zealand is starting to tighten in line with global trends due to several factors. While recent New Zealand economic data looks encouraging, with some sectors benefiting from the post-pandemic pickup, the underlying figures are beginning to turn downwards. Indeed a recent report by the IMF, published in April 2022, highlights the reduced growth forecasts for global and regional economies.

Economic Growth Forecasts

While some may argue that the above figures are encouraging, there is concern that the spectre of inflation could see future GDP forecasts slashed. So, where does this leave businesses in New Zealand?

Outlook for the New Zealand economy

In tandem with global challenges, the outlook for the New Zealand economy is beginning to cause concern. There is no doubt that recent business activity numbers have benefited from a lifting of Covid restrictions. However, it looks as though the welcome bounce in consumer demand and business activity may be short-lived.

There are many issues to take into consideration, which include:-

 

New Zealand inflation

The New Zealand authorities recently announced inflation data for the first quarter of 2022, which came in at 6.9%, compared to the same period in 2021. This was on the back of a 5.9% increase in the previous quarter and concerns that inflation could move significantly higher in the short term. The figure of 6.9% is the highest since June 1990, when the consumer price index increased by 7.6%, and a sharp rise from the recent low of 0.29% in 2015.

While shortages in the employment market have prompted a recent rise in wages, this is unlikely to continue and, in any case, will be significantly less than inflation. Consequently, on a relative basis, the income of many New Zealand families will start to fall.

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New Zealand interest rates

The global trend, which saw interest rates slashed to record lows, to support businesses and consumers during the pandemic, is turning rather abruptly. The New Zealand Reserve Bank uses the Official Cash Rate (OCR) to implement monetary policy, i.e. set interest rates. Having fallen to 0.25% in March 2020, the rate began to tick up in October 2021, rising to 0.5%. Subsequent rises in November 2021, February 2022 and April 2022 now see the rate standing at 1.5%. It seems inevitable that rates will rise in the short to medium-term, but there is a degree of uncertainty as to the extent.

While a relatively basic tool, increasing interest rates makes borrowing more expensive and will help curtail consumer exuberance. Ultimately, the hope is that increased borrowing costs will reduce demand and chip away at the 30-year high inflation rate. Unfortunately, consumers and businesses will suffer in the meantime, and bank business financing criteria already tightening.

 

New Zealand unemployment figures

As we alluded to above, the New Zealand economy has benefited from pent-up consumer demand due to the pandemic. While the pandemic is not over, the lifting of restrictions has been a welcome relief for many businesses. A tightening of the employment market saw New Zealand’s unemployment rate remain at 3.2% during the first quarter of 2022, an all-time low.

Due to a lag against economic performance, the rate is likely to remain relatively low for the foreseeable future. However, the New Zealand Treasury recently released forecasts for unemployment which is expected to rise to 4.8% in 2025.

 

New Zealand economic growth expectations

Recent data released by the New Zealand government shows that the economy rebounded strongly in 2021, with GDP growing by 5.6%. A mix of low-interest rates, historically low unemployment and pent-up demand were behind the impressive growth of 2021. However, forecasts for 2022 have been downgraded, with growth now expected to come in at around 2.7%.

While the lifting of Covid restrictions boosted the New Zealand economy, there are many issues to consider when looking at future economic growth:-

• Geopolitical tensions surrounding Ukraine
• Global supply chain disruptions
• High inflation
• Slower growth expectations for close trading partner China
• Rising mortgage costs
• Increase in household debt
• Further Covid outbreaks

If, as expected, inflation and interest rates continue to rise in the short term, this will place more pressure on short-term economic growth. Consequently, some experts fear that 2023 will see no growth in the New Zealand economy. Indeed, if the global situation worsened, there could be potential for a recession.

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Cost of living crisis

While wage inflation, remaining stubbornly high, together with relatively low unemployment figures, has shielded the New Zealand economy to a certain extent, the cost of living crisis is likely to get worse before it gets better. Eventually, unemployment will grow, consumer spending will fall, and many people will be struggling to maintain their debt repayments. In addition, there are already signs that growth in the New Zealand property market is faltering, and default rates are expected to increase.

Even though the current inflation rate of 6.9% compares favourably to the likes of the UK, currently running at 9%, this is unlikely to be the end of the rise. Energy prices continue to move higher, which significantly impacts consumer spending and business activity. So how will this affect the New Zealand business lending market and access to start up business loans in 2022?

Business and consumer market trends

A recent report by Centrix has cast a fascinating light on the New Zealand economy, consumer trends and demand for business finance. Some of the prominent statistics include:-

• New residential mortgage lending down 31% year-on-year
• New lending for non-mortgage down 11% year-on-year
• Credit card applications down 35% year-on-year
• Personal loan applications down 8% year-on-year
• Mortgage applications down 12% year-on-year
• New lending down 30% year-on-year

Currently, arrears on home loans, credit cards and secured vehicle loans remain relatively low. However, there has been an alarming rise of 9% in the number of individuals behind on unsecured personal loans. There has also been a worrying increase in the number of people in arrears on buy now, pay later arrangements and telecom accounts.

These figures in isolation are concerning, but there are other factors which suggest the worst may be yet to come:-

• Interest rates have only just begun to tick higher, remaining at relative historic lows
• Inflation recently hit a 30 year high, and many expect this to rise even further
• Gas and electricity bills are still plagued by upward pricing pressure
• An anticipated increase in unemployment will push many people into arrears on their loans
• An ongoing slowdown in the housing market, together with an increase in mortgage rates, will see more people facing financial pressure

Against this backdrop, it is not difficult to see the challenges for businesses looking to borrow money, many of whom will still be paying back emergency Covid funding. So what are the options for companies looking to borrow funds in the short to medium term?

What is inflation

Business lending and start up business loans

Initially, the New Zealand government encouraged banks to assist viable businesses looking to make it through Covid. Even though many industries are now seeing significant growth, as a consequence of pent-up demand, this may be relatively short-lived. The economy is expected to slow, consumer debt is rising, and inflation is still out of control. Traditionally, central banks would use interest rates to deflate inflation, but these are not traditional times.

We know that global supply issues for various ingredients and products have caused a significant price spike. An increase in borrowing costs would generally help reduce demand and ease inflationary pressure. However, the ever-growing cost of gas and electricity is worrying. There is still ongoing upward pressure due to supply issues involving Ukraine and Russia. On top of this, governments worldwide have been on a green energy mission which has seen energy-related taxes increase to fund new projects. Consequently, traditional banks are:-

• Tightening their business financing criteria
• Increasing interest rates in line with base rates
• Reducing general access to short-term finance

Many high street banks already have problems on their balance sheet due to Covid loans, which could “turn bad”. While this would likely have been a different story without the recent rise in inflation and cost of living crisis, the situation has changed dramatically of late.

Personal and business credit scores have been improving recently, but the lag between an economic downturn and loan defaults will soon reverse this trend. This will see traditional banks turning their backs on many individuals and businesses, with access to start up business loans also likely to suffer. Consequently, many are now looking toward loan companies such as Crester Credit which offer an array of finance packages and the opportunity to build a long-term financial partnership.

Working with financial partners

Situated between the traditional banks and payday lenders, Crester Credit can offer a range of products for those falling between these two areas of the market. For many businesses, the opportunity to create a long-term relationship with financial partners could be the difference between survival and failure. Some of the benefits of working with a financial partner include:-

• A greater understanding of the business, people and long-term prospects
• A long-term view of finance requirements, often overlooking short-term bumps in the road, in favour of long-term prospects
• The ability to react relatively quickly to changing markets and refocus business lending facilities

Perhaps the most significant benefit of working with a financial partner is the fact that you are not just a number; you are a business and an individual.

Planning ahead

At this moment in time, as economic uncertainty begins to impact consumer confidence, many businesses are looking to the future with concern. As we saw during the Covid pandemic, many still see a long-term future but there may be short-term challenges which need to be addressed. While it would be foolish to suggest that reckless business lending is beneficial to anyone, taking a sensible long-term structured approach to finances can be a game-changer.

Removing a degree of uncertainty from businesses allows directors and employees to focus more on their business than short-term financial challenges. There is no escaping the fact the next few years will be challenging; business lending criteria will continue to tighten, access to start up business loans will reduce and interest rates look set to rise further. However, help is at hand, finance is available for those having short-term issues, and the benefits of a long-term financial partner could prove invaluable going forward.

Summary

At the moment, the New Zealand economy is benefiting to a certain extent from pent-up demand as a consequence of the lifting of Covid restrictions. However, some of the more positive trends of late are beginning to turn. As a business, it is crucial to have the support of your lender/financial partner as a means of addressing short-term issues in order to benefit from long-term potential.

Ironically, many businesses are now starting to benefit from a return to more personal relationships with their lenders/financial partners. This is in stark contrast to a tightening of traditional bank business lending criteria and the ongoing policy of treating customers as numbers instead of businesses and individuals.

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