In conversation over the weekend, some people asked why I was making a big deal about the ANZ penalty rate of 26-27% (more if interest rates rise, less if they fall). After all, they’re not planning to miss any payments, so they will be fine.
Well, they probably will be. Banks will also usually (they do not have to, and can change their mind if they feel like it) give a few days grace so that the penalty rate will not kick in immediately if there is some problem with the automatic payment.
However, it is a fact of life that businesses get into cashflow trouble sometimes, often not of their own making. All it takes is for a key client to get into cashflow trouble themselves, delay their payment to you that normally comes in on the 20th of the month, and it will be your cashflow that catches the same cold.
Having gotten into trouble, you now need to get matters back on an even keel. For most of us, we will have a cashflow reserve that can cover the payment to the bank. Normally, that is….but for many businesses in New Zealand these aren’t normal times; they are very lean and hard times that some have been surviving only by the skin of their teeth. The reserves have been slowly drained away over the past three and a half years.
So you miss a payment to the ANZ. What happens to you then? Well, you have to catch up, right? And that’s where you trip up.
Your interest payments – which is what most businesses are paying – have suddenly gone from, say, 6.5% to 26%. They’ve quadrupled. How on earth are you going to get matters back on an even keel?
Answer is that you probably aren’t, not without an immediate influx of capital before matters get out of hand…and the penalty rate is so draconian that this will happen very very quickly. Got no immediate source of credit? Tapped out family already? Then watch your business…and your family home that is underpinning the borrowing…slide further and further into the hole. If you were struggling to pay 6.5%, you’re never going to catch up when it’s 26%.
Eventually, you can look forward to the sale of the secured property and your business being wound up/sold, quite possibly with a large shortfall still owed personally by you and perhaps your partner, and more than likely comprised not of principal, or even “normal” interest, but of interest charges racked up under a draconian and in my opinion irresponsibly greedy penalty interest rate; a rate that will see some borrowers fall into trouble and never recover.
The moral is not to become one of them – and of course that answer is more about watching your own cashflow and debtors like a hawk – but you should also be checking the penalty rates when you finance or refinance and avoiding banks taking an extreme position. Sure a bank is entitled to take a risk margin where the borrower is in default. Just ensure that it is somewhere within the bounds of reason and that there remains some light at the end of the tunnel.