Taking on a business loan is a big step for Kiwi owners. Our guide offers a practical framework to minimise risk, covering cash flow forecasting and how to avoid common pitfalls.
At a glance
- Minimising risk on your business loan begins with establishing a clear purpose and strategic timing that drives growth, not just covers a temporary shortfall.
- Confirm repayments will be manageable by stress-testing your cash flow for various outcomes and keeping a cash buffer for unexpected events.
- Avoid common pitfalls like underestimating the loan's total cost, stacking multiple loans, or signing a Personal Guarantee without knowing the full risk.
Taking on a business loan is a major milestone for any business owner. While funding growth is exciting, the thought of managing repayments through slower periods can make even the most confident owner pause. And rightly so. It’s this careful consideration that ultimately safeguards your business’s future.
For business owners in New Zealand, this is especially important right now. In August 2025, the Reserve Bank of New Zealand (RBNZ) cut the cash rate to 3%, a 2.5% decrease from the 5.5% rate in July 2024.
But the official cash rate doesn’t tell the whole story. According to the RBNZ, average interest rates on new SME overdrafts in New Zealand have been around 11-12%. This gap between the headline OCR and the actual cost of borrowing is a powerful reminder that careful planning is essential before taking on new debt.
The great news is that managing this risk doesn’t mean giving up on growth; it’s about being prepared. Think of this guide as your practical playbook, designed to help you navigate the process and borrow with peace of mind.
Is now the right time to take on a business loan?
The first step in reducing risk is making sure a business loan is the right decision in the first place.
Start with the purpose. A loan is easier to justify when you use it for something with a measurable return, such as equipment to increase output or the upfront costs of a secured contract. When you can draw a straight line from the loan to new revenue, the risk is far easier to manage.
If the loan is mainly to cover temporary shortfalls, it could be worth exploring other solutions, such as a business line of credit. Timing also matters. If your business is heading into a busy season, then additional revenue can support repayments. If you are facing an uncertain period, it may be better to hold off.
Imagine you run a small adventure tourism business in Queenstown. It’s April, and a supplier offers a discount on $30,000 worth of new ski and snowboard gear, but payment is due immediately. By using a business loan to secure the new equipment before the winter season rush, you can attract more customers and charge a premium. The loan has a clear purpose (new gear), a direct return (higher rental income), and perfect timing that aligns with your peak revenue cycle.
With your purpose and timing locked in, it’s time to see if the numbers stack up.
How much can your business realistically afford to repay?
Once you know a loan is right for you, the next step is working out what you can afford. This comes down to two things: capacity and serviceability.
Capacity is the maximum amount of debt you can take on while still supporting day-to-day operations. Serviceability is whether your cash flow can reliably cover the repayments once they start.
Put simply, if regular loan repayments would leave your business short of cash for everyday expenses like wages, suppliers, or rent, then the loan is too big.
Let’s continue with the Queenstown tourism business example. During a typical shoulder season week, your sales might be $12,000 and your operating costs are $9,000, leaving $3,000 in cash flow. The $30,000 loan with $1,500 weekly repayments leaves a manageable $1,500 buffer. But if those repayments were to climb to $3,000, that margin would vanish, increasing your risk sharply.
Prospa’s business loan calculator can show you exactly how much your business can afford to borrow and realistically repay.
What happens to repayments if your cash flow slows down?
Knowing you can afford repayments in one scenario is important. But businesses don’t run on averages. They run through ups and downs. Stress-testing your cash flow helps you see how a loan fits into the best, worst, and most likely outcomes.
This is where a cash buffer comes in. By ensuring you have a reserve, you create a safety net that protects your business during slower periods. A buffer doesn’t remove risk, but it reduces the chance of scrambling for funds when sales are down.
Here’s how it might look for the Queenstown tourism business:
| Scenario | Sales | Costs | Cash flow | Repayments | Buffer | Outcome |
|---|---|---|---|---|---|---|
| Best Case | $14,000 | $9,000 | $5,000 | $1,500 | $3,500 | Strong position, repayments easily covered |
| Most Likely | $12,000 | $9,000 | $3,000 | $1,500 | $1,500 | Manageable, repayments covered with a buffer |
| Worst Case | $9,500 | $9,000 | $500 | $1,500 | ($1,000) | Shortfall, repayments not fully covered |
Logical scenario planning gives you a clearer view of the risks and shows how much breathing room you really have.
Building these scenarios into your business loan repayment planning is one of the most important ways to reduce risk and protect your business.
Which loan structure best suits your business goals?
Choosing an unsuitable loan structure can introduce risk you don’t need. Key factors like the loan type, its term, and the flexibility of repayments will all impact how easily you can manage the debt.
One of the first decisions is whether to take out a secured or an unsecured business loan. A secured loan is tied to assets such as property or equipment. An unsecured business loan gives you access to funds based on your performance and credit profile, without putting assets on the line. For many small businesses, unsecured borrowing is a safer way to manage risk.
The term of the loan is also a critical factor. A shorter loan term results in higher repayments, but you’ll be debt-free sooner and pay less in total costs. Conversely, a longer term makes each repayment smaller and easier on your cash flow, though the total amount paid over the life of the loan will be higher.
Flexibility is another factor. Features such as the option to make extra repayments without penalty, or redraw when you need funds, can give you more control. In some cases, comparing a business loan vs line of credit may reveal that a revolving facility is a better fit.
When the loan structure lines up with your business cycle and goals, borrowing will support growth instead of adding pressure.
What are the common borrowing pitfalls to avoid?
Careful planning also involves knowing what to avoid. Here are the main mistakes to avoid:
- Not having a cash buffer. Relying on a best-case scenario for your sales is a risky strategy. A cash reserve ensures that a slow week doesn’t put your repayments in jeopardy, keeping you in control of your finances.
- Ignoring the total cost. The interest rate is only one part of the picture. Always factor in all fees and charges to understand the true cost of the loan over its full term.
- ‘Stacking’ multiple loans. Juggling multiple loans at once can quickly become unmanageable. The combined repayments can strain your cash flow and significantly increase financial pressure on the business.
- Misunderstanding the Personal Guarantee. When you sign a Personal Guarantee, you become personally responsible for the debt if your business can’t pay. It’s vital to understand this commitment fully before you sign. You can learn more in our guide to Personal Guarantees.
Steering clear of these common errors helps you borrow more safely.
Lower Your Loan Risk checklist
While every loan application has some level of risk, thorough preparation is the best way to minimise it. Use this checklist to confirm you’re ready to move forward:
- Confirm you can afford it Run the numbers for best-case, worst-case, and likely scenarios to be certain that you can manage repayments even in a downturn
- Define your purpose and ROI Be specific about why you need the funds and what kind of return on investment you expect the loan to generate
- Understand your obligations Know that a Personal Guarantee makes you personally responsible for the debt
- Review your credit standing Your credit history will influence the terms you’re offered
- Gather your financial documents Having recent financial statements ready makes the application process smoother
- Prepare your questions for the lender. Be clear on what to ask before getting a business loan. For example:
- What is the total cost of this loan over its full term, including all fees?
- Can I make extra repayments without being penalised?
- What is the typical timeframe for a decision once my application is submitted?
| Small Business EOFY Checklist |
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Prefer a PDF version? You can also download the Lower Your Loan Risk checklist and start ticking things off.
In the end, managing loan risk is all about diligent preparation. By clarifying your purpose, confirming your numbers, and selecting the right loan structure, you place yourself firmly in control of your business’s future.
