Fear of failures as small firms start to hurt

Andrew Larsen went cap in hand to his bank - ANZ Bank - when he wanted to buy a bolt-on business for his expanding printing enterprise, Auckland-based KB Print.

He thought it was a good deal, and so did his bank. Larsen got his loan, and the new business.

"But that was in February, which is a lifetime ago in the current financial situation," says Larsen. Things are different now, he admits. And he may soon find out how different.

For Larsen is still in acquisition mode. Other businesses are deciding to cash up and move on as the economy has slowed, and that spells opportunity for more buys at good prices.

He's now looking at five potential deals and even if only one of them comes off he will have to go back to ANZ for more money.

In some respects, KB Print doesn't present a helpful profile to banks considering whether to lend money in a difficult climate. "We are a capital intensive industry and our business is fairly highly leveraged already," says Larsen. He has completed three major acquisitions in as many years. "I'm sure the bank will ask different questions next time round and will be more hesitant [to lend]," Larsen says.

He's also convinced the bank will still want to do business if the numbers stack up, especially with existing customers who have stuck with the bank.

Around the same time Larsen bought his last bolt-on business, John Dixon (not his real name) bought a franchise business in the service industry. He was a shareholder in the franchisor and wanted some action on the other side the fence.

But times have changed, even since February, and Dixon's franchise business has been bleeding at a rate of $25,000 a month.

Last week Dixon hit his $400,000 credit limit, and began talking with his bank. "But they said no, that I must put in more capital, which I am doing to cover the situation," he said. That meant selling equity investments and taking a 25% loss in the process.

Many small and medium-size enterprises (SMEs) are starting to worry that banks won't lend them the cash they need to keep businesses running, or to expand operations.

Unlike the Wrightsons and Mataura Valleys of this world, no one is saying much - yet. "Everyone is too busy husbanding what relationships they have with their bank," says Christchurch-based Employers and Manufacturers Association (EMA) chief executive John Walley. "No one wants to threaten what credit lines they already have."

According to Walley, a credit squeeze has been impacting SMEs for five months. And it won't be long before squeeze turns to crunch, with businesses either failing or by- passing opportunities to grow.

In normal times, around 5 percent of the 3000-4000 calls every month to Northern Employers and Manufacturers Association hotlines are to do with businesses in crisis. That has grown to 25 percent in the last six months, and chief executive Alasdair Thompson says many are to do with contracting credit.

"So yes, the SME sector is starting to hurt substantially at this point," says Thompson.

Laurie Margrain, chairman of Open Country Cheese and with 25 years in senior management, says refinancing deals to which banks were not irrevocably committed were being re-visited, with a tougher criteria being applied.

He says he is aware of significant deals where that had happened, and the deal had not gone through.

It would also now be difficult for a well-managed business with a good business plan and good growth prospects but which was nevertheless under-capitalised, to get the funding that the market had become used to.

"Unless your business has the capacity to grow entirely on retained earnings, then you may find it difficult to get the go-ahead from banks," Margrain says.

Tuesday's NZIER quarterly survey of business opinion reflected the difficulties facing many SMEs, which weren't likely to improve any time soon. It also recorded only 7% of businesses surveyed identifying finance as a major factor in limiting output expansion, with 68% saying sales (or lack of them) was the real problem.

Walley says the credit crunch is delivering a double-whammy blow to New Zealand SMEs. The first is that banks are no longer seeking volume business, but business with good margins.

But deals that made good business sense at 9 percent made nonsense at 11 percent, so pipeline deals were now falling through.

Banks were also asking potential borrowers for more guarantees and cross-guarantees.

Walley says SMEs most affected by the credit crunch were those with thin balance sheets highly dependent on continual cash flow.

- © Fairfax NZ News