David Irving, Chair of the ICE Foundation, outlines his personal thoughts on the Business Guarantee Scheme. The International Centre for Entrepreneurship Foundation was established in 2001 for the purpose of advancing education to benefit the New Zealand economy and its communities.
The government established a $6.2B fund called the Business Finance Guarantee Scheme to ensure money got into the hands of SME businesses and ultimately provide needed stimulant for our much weakened economy. Yet today only $30m has been advanced to businesses. I think that's 0.05%! Why the failure?
Last week I took part in a webinar hosted by Gavin Lennox, Group CEO at The Icehouse, and joined by Karna Luke, GM Growth & Performance at the BNZ, and Lincoln Sharp, chartered accountant at Campbell Tyson.
What we learned was that banks are struggling to advance the money to put right companies who have lost revenue – it seems they're just not set up to lend to failing businesses, however warranted.
Their models on which they decide whether to lend are based around growth criteria. But more than that a bank manager in the SME customer area will have a thousand clients. How does a manager with a thousand clients, whose only used to normal banking have the time or wherewithal to serve a failing SME business?
And looking at it from the SME applicant point of view, say, a hairdresser, imagine the sophisticated application system he or she has to go through. All that and then the banker mentions you have to put up a personal guarantee. What is that about?
Good question. Our banker seems to have some cards of his own. Let's say our hairdresser gets the money. What protection has the bank got the money will be repaid? Well, it turns out quite a lot. Firstly, the banker will likely take out a General Security Agreement under which what assets you have in the business will be secured to the bank. Our hairdresser will then sign a thing called a Personal Guarantee. That's to cover the bank in case your net business assets are not sufficient to meet the debt, so giving the bank access to your personal assets – yes, the family home.
After all, banks are very used to taking out mortgages over family homes. But isn't this government scheme called Business Guarantee Scheme? Yes, it is, and that means if our hairdresser’s family home is not enough, the government will guarantee to meet 80% of the remaining balance to be paid. It's not an even game.
But there are fair arguments in the bankers’ corner. Banks have shareholders and depositors. Those parties demand proper returns to match the risk of their equity and depositors are protected by Reserve Bank legislation controlling banks.
In all of this, banks are not bad intentioned – indeed there have been 40 iterations of the scheme the bank has needed to respond to. Lending is their business. But in the case of this government scheme, it isn’t working.
Maybe another agency should be used – one who is aligned with the needs of these failing SME businesses. After all, it's not an SME's fault their business is failing. They deserve a better wrap.
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