ONCE UPON A time… no, this is no fairy tale. It’s a real ac­count of a how an Auck­land-based SME was dealt with dur­ing a busi­ness loan ap­pli­ca­tion.

The busi­ness owner is in his mid30s, with three year’s his­tory and no debt. Bet­ter yet, he has never had any debt. It is a hos­pi­tal­ity busi­ness and the owner an award­win­ning chef.

Cur­rent profit (for the year 31 March 2018) is over 40 per­cent of turnover and both gross mar­gin and sales are well up on the pre­vi­ous year’s turnover by dou­bledigit growth.

As a di­rect re­sult of growth, a solid three-plus year his­tory, and nu­mer­ous re­views in both spe­cial­ist and na­tional me­dia, an op­por­tu­nity to se­cure new (larger) premises oc­curred and busi­ness plans drawn up.

By us­ing its own cap­i­tal and cash­flow the busi­ness was able to cre­ate a plan that re­quired a mod­est $100K fa­cil­ity – rep­re­sent­ing a few months profit only. They took all the de­tails to their bank and this is where the fun started.

The busi­ness has banked with the same bank since start­ing off, but was greeted with forms only; no meet­ing with a loan of­fi­cer. Ini­tially the ap­pli­ca­tion was turned down as the 2018 ac­counts were not at­tached. This was speed­ily reme­died and, just as quickly, the loan ap­pli­ca­tion re­jected – with con­di­tions.

Could they of­fer a guar­an­tor? Yes, a guar­an­tor was avail­able for the full $100K, held in cash by a ri­val bank. The guar­an­tor was re­jected as he (me, ac­tu­ally) is not New Zealand res­i­dent.

Quite why this is an is­sue is hard to see, as it is money that’s be­ing guar­an­teed, and once the doc­u­ments are com­pleted the lender has first call on the cash in the event of a loan de­fault.

I wrote to the loan of­fi­cer di­rect, point­ing out that there is no le­gal im­ped­i­ment to be­ing a for­eign res­i­dent guar­an­tor and re­ceived the most ridicu­lous piece of busi­ness cor­re­spon­dence I’ve re­ceived in years. It im­plied there was a le­gal im­ped­i­ment (I have since taken ad­vice that con­firms my view) but it went on to say I did not fit their lend­ing cri­te­ria, but… The up­shot was they would of­fer a loan on the fol­low­ing terms:

That I make a term de­posit with the bank di­rect – but place it in the name of the bor­rower (there may be a po­ten­tial breach of the An­tiMoney Laun­der­ing leg­is­la­tion here).

The amount re­quired is for the full loan: $100K.

I wrote back point­ing out a few ba­sic truths:

Were I to lock up $100K in cash at two-point-some­thing per­cent they would then on-lend this money at five per­cent to 19 per­cent, de­pend­ing on whether it is used for mort­gages, car loans or credit cards.

More­over, when any­one places money on de­posit the bank re­tains about four per­cent as cash and on­lends the balance, and each time re­tains about four per­cent in cash. The re­sult is that a sin­gle de­posit of $100K cre­ates for the bank var­i­ous lines of credit amount­ing to some­where over $1.5 mil­lion. The an­nual in­ter­est payable to the bank on that sum would ex­ceed the loan of­fi­cer’s salary – by a rea­son­able mar­gin.

The de­pos­i­tor gets around $3000 (tax­able) and the bank makes over $60,000 in a year.

The bank has no risk, no skin in the game, just mas­sive re­ward.

Re­sult? I have lent the busi­ness owner $100K and will charge him the same in­ter­est that I would re­ceive on call.

Also, the bank has lost a client and stands to lose many more as news spreads.


As a busi­ness owner I un­der­stand risk and know that banks seek to have cast-iron guar­an­tees on loans. But when they start to en­gage in inflexible ‘tick the box’ stu­pid­ity they de­serve all the op­pro­brium they get. We were not look­ing for char­ity but the nonsense that oc­curred con­firms that this bank (one of the big four) knows noth­ing of risk and was not even pre­pared to meet their pre-ex­ist­ing client, nor bother to check with their in­house le­gal de­part­ment whether a for­eign res­i­dent guar­an­tor was ac­cept­able. In short it was am­a­teur night. I’m cer­tain oth­ers will have en­coun­tered this kind of ‘tick-the­box’ be­hav­iour from their own bank – it is noth­ing new, just yet an­other il­lus­tra­tion as to why the pub­lic holds bankers in such low re­gard. On a larger scale it is even worse as banks no longer cre­ate credit just from their ‘cash ra­tios’ but cre­ate buck­et­loads of credit at the ‘click’ of a mouse. That is, they cre­ate credit out of thin air and then charge the cus­tomer hefty rates of in­ter­est.

As an aside, here in the EU banks are happy to lend across bor­ders and the lo­ca­tion of the guar­an­tor is of no con­cern. English banks will ad­vance mort­gage fi­nance on prop­er­ties across Europe and in­di­vid­u­als take out car loans which are portable across Europe.

Lit­tle won­der that the Aus­tralian Royal Com­mis­sion on Bank­ing is tak­ing th­ese prof­i­teers to the clean­ers.

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