Katrina Shanks is the chief executive of Financial Advice New Zealand.
OPINION: The warnings have been there for quite some time to expect big and ongoing increases in the cost of living this year.
We know the formula. They’ve been driven by higher wages due to our tight labour market, higher input costs due to freight cost increases such as the price of fuel, higher household costs (rents, rates, maintenance), and by higher interest rates designed to slow spending and get inflation under control.
It’s a vicious circle.
Warnings have been particularly aimed at those with mortgages due for renewal this year, but they are affecting everyone.
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And now those warnings are beginning to show up in the data.
The latest report from credit reporting agency Centrix shows the number of consumer accounts in arrears climbed by 11.8% in March. This compared to 11.5% in February and was mainly for buy now, pay later and unsecured personal loans.
Centrix said it was clear the increase was due to many more people feeling the cost of living pressure to meet repayment obligations. Mortgage arrears also climbed in March, for the eighth consecutive month, with 19,300 residential mortgages reported as past due – up 26% year-on-year.
And businesses are not immune, and it’s here there is even greater concern, because when businesses suffer and struggle, so do their employees.
A business feeling the squeeze and struggling to pay its way can lead to layoffs and families without an income as costs are trimmed in an effort to stay afloat.
Centrix says this is happening more and more.
Their data shows in March there were substantially more companies defaulting on their loans than at the same time last year.
In the construction sector, defaults were up 13%, in retail, 12%, hospitality 10%, and in property defaults were up by 3%.
Centrix said in the hospitality sector alone the more than 28,000 registered companies (4% of all registered companies) are right now two-and-a-half times more likely to fail than the typical New Zealand business. They accounted for 10% of all company liquidations in the past 12 months.
It’s a dire situation for many, and remember that something like 95% of companies are small to medium enterprises that are family-owned and operated and often don’t have either a lot of spare cash in the bank or a parent company to bail them out.
So, what are the options for a business that finds itself behind in business loan repayments?
When a customer is in arrears with repayments, they normally get escalated to a risk manager in the bank who will look at the customer’s options.
These can involve interest-only payments that can reduce the payments due. Or reduced payments over a longer period.
But to do this, the bank needs to have an in-depth understanding of the businesses’ current and future position and understand how it will trade itself out of the difficulty.
The business operator will have to spend the time on a business plan to formulate how that could work.
This may involve lowering inventory levels, which means less money is sitting dormant tied up in goods in the storeroom.
It may mean increasing margins, though this comes with a risk of losing customers who, in tight times themselves, may decide to shop around.
Other options include reducing credit for customers who are slow payers, dealing with fewer suppliers, which may give mean you can negotiate better terms with those you keep, getting longer credit terms with your supplier, or moving to cheaper premises.
There are many levers that you can pull in a business which can help with your cashflow.
But if your business is in hardship and you’ve tried some of these options and they haven’t been enough, the lender will consider hardship solutions.
But be aware this will be noted on your credit file and that may impact your ability to borrow in the future.
There are several rules of thumb to help you repay loans and get through the hump and back onto a sound footing:
Reach out for help from the lender as soon as possible – they don’t want your business to fail so they will try as hard as they can to find a solution.
Talk to someone else – the problem should be shared and talked through with a mentor, colleague, or partner. This will help with your stress. You don’t need to be alone.
Plan, plan, plan – sit down and work out a way forward. Doing the same thing gets the same results, so think about what you can change, or understand the environment and ask yourself will that change make a difference.
Work out how much breathing space you need and build that into your plan.
The bank is not your only option to obtain funding – there are non-bank lenders who are reputable and offer relatively good terms. In many instances, the interest rates will be higher than a traditional bank, but they are a good short-term solution if you need to consolidate your debt.
If your business cannot trade out of its financial position, seek professional help as to what your next steps are. Being a business owner can be a lonely, exhausting and stressful – you don’t have to do this alone.