[OPINION] How brokers can diversify to support small business

The current economic environment is no doubt tough, and small businesses are anticipating when things might become more friendly to business growth and interest rates might inch down. Residential lending is on the wane, but businesses need liquidity and the need for funding to kickstart growth is on the up.

A broker’s role is to be aware of both the economic constraints and the opportunities for growth.

Recent research* commissioned by Prospa, New Zealand’s SME financial services partner of choice, showed that SME business confidence had increased significantly over the long-term.

At the same time, Kiwi small businesses expected they would need greater levels of funding going forward (an average of $40,800), compared to loan amounts they had applied for in the six months prior (an average of $24,800). Eight out of 10 small businesses say they are becoming more concerned about accessing the funds they need.

Cutting through the noise, small businesses are wary but clear-eyed about the challenges: cash flow, managing demand, and access to working capital.

The Reserve Bank of New Zealand’s 12th consecutive rate hike, taking the Official Cash Rate to the highest it's been since 2008 at 5.5%, has led to a significant escalation in business operating costs and eroded already slim margins. The next review is due on 12 July.

The impact of these hikes was highlighted in Prospa’s RFI research, with responders citing economic and regulatory factors as the top challenges they’re currently facing. The uncertainty of future profits when trying to plan for the future (25%) and dealing with late payments (19%) were the two biggest concerns of small businesses around cash flow, according to the research.

In these scenarios, small businesses have a greater requirement for advice and lenders that can work to unleash their potential. The research also found that lower fees, faster access to funds, more flexibility and good advice were some of the reasons that small businesses might look to alternative lenders. Prospa’s role is to help simplify financial management, with a range of tailored lending solutions.

"There is no doubt it is currently belt-tightening time on the small business front. But there are things that small business owners can do: review cost structures, renegotiate contracts with vendors and customers, prioritise positive cash flow and build a stronger balance sheet,” says Adrienne Begbie, Managing Director NZ at Prospa.

These steps can include financing options with non-bank lenders such as Prospa, as well as reviewing and optimising debt structure while building cash reserves.

“Non-banks are in a strong position to help small businesses as mainstream New Zealand lenders take proactive measures to manage risk and be prudent in their approach in the wake of the Silicon Valley Bank collapse and Credit Suisse buyout,” Begbie says.

Financial institutions are re-evaluating risk policies and tweaking their risk appetite to be in good shape to weather current and future market conditions. Large banks in particular tend to refocus on their core business - residential lending - and withdraw from peripheral activities such as business financing. Small business lending has never been a core business for banks.

“These are the market conditions in which turning to specialist lenders like Prospa makes sense. We understand the needs of small businesses and can leverage our strong broker network, while providing flexible funding solutions that match the needs of small businesses,” Begbie says.

In March, Core Logic data analysis showed that interest rate hikes and lending rules had triggered the biggest property sales slump in 40 years, and although slight increases in Auckland and Wellington have been observed, market activity remains subdued.

Brokers are chasing a shrinking prize in the residential market and now is a great time to consider diversifying their services into small business lending.

“In this environment where small businesses can’t rely on banks to fund their growth, there’s a real demand for expert advice on how to operate in this environment and what their choices might be. Brokers can take advantage of this by diversifying into the small business lending market.”

“Savvy brokers may want to look out for opportunities to leverage their existing client base to expand their services. Ask questions about your client's cash flow and forecast, what their pain points are and consider whether that asset might be able to be financed with a Prospa Small Business Loan or Business Line of Credit.

“Brokers new to the area may want to dip their toes in first to test the water while continuing to grow their core service,” she says.

“However, as economic cycles are temporary, brokers can position themselves to thrive in both residential and small business lending,” adds Begbie.

*The study was conducted by RFI Group and commissioned by Prospa, with a sample of 518 SME surveyed between 3 November and 20 December 2022. The research is conducted with the New Zealand SME Banking Council biannually in May and November.