Small businesses, already suffering from the fallout of Covid-19, have had the money tap turned off by banks as a result of changes to the Credit Contracts and Consumer Finance Act, claim experts.
Most small businesses that Business Mentors New Zealand works with secure loans against their homes, says Sarah Trotman, the group’s chief executive. But Covid-19 and now the CCCFA are making life a lot tougher.
Businesses struggle to get unsecured business lending, says Trotman. “Unsecured [business] lending is almost unheard of. There is no question the banks’ preference is to make sure there is a mortgage secured against the family home.”
Top-ups now require the same prescriptive process in the CCCFA regulations faced by other home-buyers, with banks drilling down into account statements to verify a borrower’s income and expenses.
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Squirrel chief executive John Bolton, who has led the charge for a review of the 2021 amendments to the CCCFA, says it’s killing small businesses.
Bolton points out that that the 54% of household wealth tied up in residential property is a lifeline for small business. “It’s money that oils the whole small business sector. You just can’t turn off the tap,” he says.
He says has seen numerous examples of CCCFA hurting small businesses. “I was just with a client. He’s a shareholder of a start-up, but he also gets paid a salary. Because he’s a shareholder the bank has to apportion some of the company’s losses [against the client’s earnings]. He might have a salary of $150,000, but they apportioned $300,000 of losses to him, even though he has a big New Zealand corporate as the other shareholder.”
Bolton adds: “It’s very difficult for entrepreneurs that are early-stage businesses to do anything anyway. But the CCCFA is adding another layer on top of it.”
He says it is hard to assess the true scale of the problem. “There is no good reporting in New Zealand and there never has been on the relationship between residential mortgages and small businesses. I've never seen data to tell me how much of the residential mortgage market is tied to business owners.
“We can debate the merits of whether the property market is an appropriate place to be holding your wealth, but the simple reality is we do.”
A lot of small business funding is tied up in residential mortgages. Photo / Getty Images
Bolton says a better way of slowing down lending would be to increase interest rates, which means borrowers pay more, but doesn’t indiscriminately restrict credit to those who need it.
Trotman agrees. “We’re hearing back through our mentors that some businesses are just failing to get the borrowing they would have got previously. They’re having to jump through more hoops,” she says.
“Banks are being significantly more thorough and more interested in day-to-day spending habits of the business-owners.
“I don’t want to see banks using the CCFA as an excuse for not lending. I’m thinking here about the wish for the bank to preserve their relationship with the business client.”
Loanmarket Agile mortgage adviser Rodney King, who has worked in business banking for 30 years, says small businesses are struggling more than ever to raise finance. He has seen a steady stream of businesses that been unable to top up their mortgage with mainstream banks in the past two years, in particular since the CCCFA reforms came into effect in December 2021.
“Business owners are absolutely impacted [by the CCCFA]. We have a number of customers that have obviously had a difficult past two years, and need support from the bank.” Their financial performance may look weaker than it did pre-Covid. But this is the very time they need support.
Yet the CCCFA has made life even worse for these business owners, says King. It’s not just when they want to extract capital for the business. They are also struggling to upgrade their homes or re-mortgage.
Many may have reduced their drawings from the business to keep the business going, which then results in them failing the banks’ affordability tests because their income has dropped. Often, they’re only looking at relatively small increases in the mortgage.
King cites one self-employed customer who is going through a financial split from his wife. The client had been paying the entire mortgage with ease for the past two years, despite being in an industry hard hit by Covid. When he went to re-mortgage into his own name in early 2022 the bank said “no”, even though there was evidence he was already paying the same as the new mortgage.
King has managed to find finance for some of these business owners by re-mortgaging with another bank. “In some cases, we couldn't get them on approved and we’re looking at non-bank lenders who are really stepping up and being pragmatic in your approach.”
Business New Zealand chief executive Kirk Hope says that business loans secured against the home won’t be considered CCCFA loans by the banks. Top up loans on the mortgage to be used for business purposes may be affected.
