Section 6: Access to Finance and Grant Assistance
Access to capital in New Zealand for purchasing a house, a car, a boat or even household items, e.g. televisions, refrigerators and furniture, is relatively uncomplicated. Larger items, like houses and cars, in themselves, are sufficient security for a bank or finance company to loan against. However, efforts to source capital on the basis of a business idea or expansion of a business that offers little hard security for the lenders are generally rebuffed by financial institutions.
Therefore, SME owners normally have to mortgage personal assets to fund the start-up and growth of their business. This demand by financial institutions for the provision of personal securities also effectively undermines the status of a small, limited liability company.
Some SMEs can borrow from family, friends and the rare business angel. However, more often than not, the growth potential of many SMEs is not realised because they cannot secure capital.
In New Zealand, the government's Venture Investment Fund experiment appears to have had minimal effect to date in expanding the size of the venture capital funds available for new ventures. In many overseas jurisdictions, governments have responded to the challenges SMEs face in raising finance by providing funds at subsidised rates or providing guarantees for SME lenders. We recognise the inherent challenge of governments making lending judgements in competition with those of well-functioning financial institutions. However, we think that there is an important role the government could play in encouraging the financial institutions in New Zealand to revisit their asset-based lending criteria and to look at criteria more suited to the situation of SMEs.
That the government undertake policy development work aimed at making access to funds easier for
SMEs with growth potential (e.g. encouraging banks to lend on cashflow / character in addition to assets; loan guarantees).
Accelerated Depreciation
Lack of finance and financial stress during periods of expansion are inhibiting factors for many SMEs when contemplating making a significant capital investment in their business. This flows on into lower national productivity levels.
During expansion periods, when installation, operational, training and marketing factors dominate management's time, SMEs are at high risk. Financing expansions is difficult for SMEs. Lending institutions concentrate on short-term security which impacts on cashflows during business expansions. Adjusting taxation outflows seems to us to be a straight-forward way of reducing risk and smoothing cashflows at these critical times for SMEs.
This proposal would involve increasing the currently allowable tax deduction for depreciation in the first three years of plant installation and offsetting that by lowering the current deduction for depreciation rates in the following years when the expansion is maturing. Therefore, this proposal would be fiscally neutral in terms of tax revenues received over the life of the plant. It is not reducing tax owed - merely changing the timing of taxation flows.
That the government urgently undertake a revision of rates of tax deduction for depreciation with the view of reducing taxation in the first three years of plant installation, and offsetting that with lower allowable tax deductions for depreciation in the following years.
Sales and Marketing Support
A major challenge for SMEs is generating more sales. To achieve this they need to implement sensible sales and marketing strategies.
Most SMEs will have a sales programme of some kind in place, but will not have a marketing strategy. Both of these problems are endemic in the New Zealand context as we do not have a large enough domestic market to create brand presence and income for sales and marketing activities.
The government already provides grants for the development of marketing and sales strategies through NZTE. This includes basic marketing advice and training, information on particular markets, methods for accessing and selling in overseas markets, and funding for high growth firms to obtain professional strategic advice. This support is helpful, but often SMEs then lack the funding to execute these plans or strategies.
Therefore, there is a need for funding for the implementation of the marketing strategies. The recently announced Market Development Assistance Grant appears to move towards assistance in this area, but the precise terms of its operation have yet to be formulated. The FRST "SmartStart" programme also provides limited marketing assistance for innovative products.
That the government develop a strategy for providing assistance to
SMEs to implement sales and marketing strategies and plans.