Not long ago, one financial adviser was heard to lament the Kiwi habit of using the mortgage to fund the business. Others turn to bank overdrafts or their personal savings – all of which some might argue are easy choices to make but not necessarily the best.
Putting one’s house on the line to help the business through a tight spot may be less risky in times when property prices are at an all-time high, and interest rates are low.
However, blurring personal and business finances can cause sleepless nights. Business is unpredictable. Interest rates will go up at some point.
Research by YouGov, commissioned by small business lending specialist Prospa, found that 69 percent of SMEs use personal finances for business purposes – including credit cards – and one in four borrows from family or friends.
Approximately 21 percent had drawn down on the mortgage.
The difficulty of securing business finance from banks in New Zealand is well documented. Even at the height of COVID-19 lockdowns, banks kept their hands in their pockets after the Government stepped up with the Business Finance Guarantee Scheme. Associate Finance Minister at the time, Shane Jones, suggested the banks were jeopardising their ‘social contract’.
It would not be surprising to find that this kind of publicity, coupled with a widespread perception among SME owners that banks don’t lend to small businesses, creates a general pessimism about finance that drives Kiwis to put their houses up as security, borrow from friends or swipe the credit card. Utilising personal resources is a shortcut, but easy is rarely better.
Before you borrow or mix personal and business finance, consider the options below.
Self-finance
Consider reducing your costs as a way to self-finance your business.
Businesses incur costs, such as small but regular payments that slip beneath the radar. Work with your accountant to identify unnecessary expenses and ways to save on costs — review operational details like slow collections, bad debtors and redundant or excessive inventory.
One consequence of tight cashflow is the failure to pay taxes on time. This leads to expensive IRD interest and penalty payments. Tax pooling offered by Tax Management NZ will help save you money in the long term because you avoid interest and penalties.
Research alternatives
Tax pooling is an alternative and financially cost-effective way to meet your tax payments on time, but there are also many other ways to get business finance.
The Government’s Small Business Cashflow Loan Scheme, if you have experienced a 30 percent decline in revenue due to COVID-19), discount invoicing (you administer your sales ledger) or factoring (the factoring company administers your ledger) merit thought.
Other options may include attracting investors or turning to a second or third-tier lender who is more expensive, but you may not be required to put your house on the line.
Review payment terms
Together with your accountant, consider negotiating better terms with your debtors while also reviewing your current payment terms. Simply changing your terms to, for example, seven days with all new customers – or getting the agreement of existing customers – could make a big difference to your finances.
Ultimately it may be that mortgaging your house is your best option but get expert advice first because easier isn’t necessarily better