Father and son taking on banks over costs
There's not a lot of transparency around overdraft rates at the banks, but a father-son operated finance company may change all that.
Generally there are two elements to the cost of a bank overdraft - an annual fee calculated as a percentage of the overdraft limit, and an interest rate calculated on the sum drawn down. This is shown on bank websites as a base rate, plus a "margin" for risk which varies for different businesses.
Veteran financier Terry Haydon, managing director of Cashflow Funding Ltd, said the overall cost of the overdraft tends to end up at around 15 per cent to 16 per cent for a small to medium-sized business in the $100,000 to $3 million turnover range.
CFF wants to win this business off the banks by offering cheaper overdraft facilities to qualifying SMEs at 3-5 per cent annually per less than traditional lenders by taking security over the business' current assets.
In most cases it will also offer more credit than a small business owner might otherwise expect from their bank, said Haydon. He has been in finance for 40 years including with Broadlands and Broadbank in the 1980s and prior to that Marac, though it is his son, Marty, who developed the system behind its secured-overdraft lending.
"We're targeting those genuine Kiwi businesses that have business-to-business annual turnover in the $100,000 to $3 million bracket that are basically the backbone of the New Zealand economy," said Terry Haydon.
"Those smaller operators typically secure their initial funding against the family home and find it hard to source and finance funding they may need for working capital or for growth."
That mortgage-backed lending forms the heart of bank SME lending, Haydon said, though many SME owners resent having to put their family home on the line to fund their business growth.
Given the security the bank has through such lending, it is hard to understand why they charge small businesses so much more for their overdraft rates than those charged to ordinary homeowners for their mortgages, Haydon said.
Even if there is no term funding for a business and banks are only providing overdrafts for SMEs, they still require security over owners' homes while also taking a general security agreement (GSA) over all the businesses assets.
But Haydon said with many SMES overdraft facilities could be secured against the current assets of their business rather than against their homes.
"What we are offering is to back the current assets of the business - it's work in progress, stock and debtors - and use those, instead of the family home, to free up the cash a business may need for new tools or software, new stock or an additional staff member that will help with growth."
CFF has been launched as a sister company to Haydon's commercial factoring business and it has created an overdraft calculator for its website that will show SME owners if the rate it's offering beats those of other retail banks.
Haydon is convinced many SME owners don't have a good handle on the real interest rate they are paying.
"Our difference at CFF is that what you see is what you get as there are no additional fees or management costs that can inflate stated base rates. If you take out an uncapped overdraft with us at say 10.5 per cent, then that's what you pay."
And there is a gap in the market, Haydon said: "Since the finance companies failed so miserably, and damaged so many people and businesses, there have been fewer options in the market to help fund the growth of SMEs. However, we know there is ongoing demand for the type of funding they provided that is not being fully met by traditional lending sources."
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