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WORKING CAPITAL LOANS AND BUSINESS CREDIT LINES
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Financing & Cash flow are the biggest issues facing business today
ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?
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EMAIL - sprokop@7parkavenuefinancial.com
Business Credit and bank loans in Canada. When business owners and financial managers have successfully negotiated working capital facilities or term loans it should not be the end of the story – It needs to be credit and working capital used to cover the funding needs that work for you, not just for the bank. Whether it's a line of credit or a term loan/business loan it's always important to understand the borrower/lender relationship on an ongoing basis.
WHAT DOES THE BANK AND COMMERCIAL LENDER REQUIRE FOR BUSINESS LOANS
By that we mean that the business person needs to continually focus on what the bank or other financial institution requires, and more importantly, how they view the customer from a control point of view - i.e. are they in control or able to exert control on your business as it relates to working capital needs in the short term. The personal credit history and credit score and experience of the business owner also factor into commercial lending decisions.
UNDERSTANDING THE BALANCE SHEET
The balance sheet must be a top focus for the business owner - once a firm is over-leveraged, i.e. borrowing too heavily, the bank generally starts positioning around their overall security or your ability to de-leverage. That could impact new equipment needs as well as other growth possibilities.
WATCH THOSE TRIGGERS ON RATIOS AND COVENANTS
Borrowers must be comfortable and knowledgeable about the use of 'triggers '. Triggers are the implied actions the bank or institution will take when things aren't working out. This can include everything from general poor financial performance and negative working capital ratios to very specific pre-agreed-upon financial ratios. And the business owner must remember that he or she agreed to and concurred with these ratios.
IS YOUR CASH ' FLOWING '?
Banks want to see cash flow ' flowing ' - flowing to repay their debt and cover accounts payable and other lease and loan commitments - so there may be triggers put in place by the bank to ensure that minimum cash flow standards are kept, and also that owners and shareholders do not withdraw excess funds.
Over time business owners will probably find, in our experience, that the bank restrictions either tighten up or loosen, depending of course on the overall comfort level the bank has with the firm. Clearly, firms that seem temporarily challenged in profits and balance sheet quality will receive much more scrutiny.
Business owners can do some very solid and valuable preparatory work in the negotiation of bank triggers. If they have a solid long-term history of earnings this should be a very strong negotiating point with the institution. Simply by self-introspection of the firm can the owner or financial manager focus on what is going to go wrong regarding sales, pricing, forex, etc. The owner needs to be able to talk to these issues and show how he could address them.
REVIEW YOUR OPERATING RATIOS
For a start calculate your own key operating ratios, if they are going to be discussion points with your bank or institution you might as well know your numbers now. Using 'what if 'scenarios help immensely and will position yourself as knowledgeable about your business.
Discussions with your bank need not be absolute and immediate at any time of loan negotiation - you can get a great informal sense of what the bank is thinking and work from that point forward. Try and read between the lines as to what is hot, and what a Vis is not with the bank Vis their perception of your firm, industry, etc.
CONCLUSION
In summary, business owners need to show maximum flexibility on working capital and loan negotiations. Negotiations should be from strength, accentuating the positive. Example - strong forecast sales and profits and potentially offset a weaker balance sheet. Trade-offs with the bank is also encouraged- and fewer triggers and covenants are better than more!
And yes, there is more than one bank in the world, although business owners should be cautioned that shopping around is not optimal at all times, and can in fact backfire, particularly a small business that is just focused on interest rate versus a long term relationship. Business owner beware! Small business owners are sometimes too focused on interest rates, forgetting numerous other key factors in the borrower/lender relationship.
Whether it's short-term business needs or long-term financing with fixed repayment terms needs, such as a cash flow term loan seek out and speak to a trusted credible and experienced Canadian business financing owner for optimal solutions to bank credit and business capital financing option possibilities in Canada.
Click here for the business finance track record of 7 Park Avenue Financial
Stan Prokop
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