How to choose a lending product

NZ Lending products

A finance broker shares their tips for small business owners looking to make smarter investments, and how to choose a lending product that suits their circumstances.

At a glance

Here’s a snapshot of the insights from our interviewee:

  • Access to credit can help small business owners invest in growth.
  • A well-suited lending product represents an investment in the future – one that can help to grow a business.
  • Choose a lending product that’s right for your circumstances – which could be a small business loan or a business line of credit.
  • Whatever you choose, keep on top of repayment terms.

Kiwi small businesses have seen it all in recent years. COVID lockdowns, rising operating and transport costs, talent shortages and more have all exerted an impact on business confidence – with only 37 per cent of small business owners saying they are very confident about the future of their business over the next five years.*

Through it all, however, owners have persevered and are slowly regaining their confidence, including when accessing small business funding.

Rather than being a burden on a small business owner’s finances, a well-suited lending product is an investment in the future. Owners willing to capitalise on the opportunities provided by access to credit can achieve growth that sets them up to succeed this time tomorrow.

Although Quentin Glover, founder and owner of Profinance, says the current economic climate has prompted some small business owners to lose confidence about their ability to thrive, others have identified the chance for growth and are taking action.

“Borrowing money is about progressing and growing a business,” says Quentin.

Choose a funding type that suits your circumstances

So how do business owners identify the lending product most appropriate for them? Quentin suggests first identifying the scope of the project or purchase being made that requires external funding.

Funding for large, one-off payments on assets that depreciate over time, for example, might be benefited by a small business loan, which provides a lump sum upfront that borrowers then pay off over a set period.

“If you’re looking to scale operations and move more stock and inventory into your business, consider applying for a small business loan,” says Quentin. “Let’s say you’re a seller of farm machinery, and you import stock from overseas. You pay upfront, wait two months for manufacturing, then it’s on the border for six weeks. Then you have to sell it and turn it into cash.”

The protracted turnaround between making the purchase and recouping the costs, alongside the high upfront cost of the purchase itself, can diminish the working capital at the hands of owners. A long-term purchase, therefore, can be matched with what Quentin calls “a long-term solution” – such as a small business loan with a fixed repayment rate.

By contrast, a business line of credit can be useful for businesses that “make a lot of money in a few months before sitting quietly for the rest of the year”, says Quentin.

Businesses with large seasonal movement, such as those in the primary industries, hospitality and tourism, might get more out of a line of credit than a small business loan (although advice will always vary depending on specific circumstances). A line of credit can have a cushioning effect for businesses with uneven cash flow, helping them to cope with the natural ups and downs of the industry.

Keep on top of repayment terms

To make the most of funding opportunities and given the existing uncertainty around when interest rates will start to level out, Quentin says that small business owners ought to consider loan products with a fixed repayment rate across the term of the loan. This way, they minimise the chance of being caught out by a hike in repayments.

A Prospa Small Business Loan, for instance, takes a fixed-cost approach to lending – the amount of the loan isn’t affected by changes to the cash rate.

Quentin also recommends small business owners try to forgo concern around the current climate and focus on doing as good a job as they can do. By selecting an appropriate lending product at an appropriate time, owners can make the most of access to credit and invest in their business’s growth.

*RFi New Zealand SME Banking Council, May 2022

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