Abstract

This paper examines the structural barriers preventing New Zealand's small and medium-sized enterprises (SMEs) from accessing affordable debt. Despite representing 99% of all businesses and a third of national GDP, SMEs face far tighter lending conditions than residential borrowers. Through quantitative scenarios, the paper demonstrates how short loan terms, high interest rates, and restrictive loan-to-value ratios severely constrain cash flows, leading many profitable firms toward financial stress. It also highlights how regulatory incentives—particularly the Reserve Bank's high capital adequacy ratio—encourage banks to favour residential mortgages over business loans. The analysis identifies three key issues: limited understanding of cash-flow dynamics, policy-driven risk aversion among banks, and a feedback loop reinforcing SME credit scarcity. Recommended measures include recalibrating risk weights, strengthening bank verification processes, and launching nationwide financial education initiatives to help SMEs manage debt sustainably and unlock growth potential.

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