YOUR COMPANY IS LOOKING FOR A BUSINESS LOAN!
SMALL BUSINESS FINANCING 101! UNDERSTANDING THE BUSINESS BANK
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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
7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
How to get a business loan in Canada - we get that one every day here at 7 Park Avenue Financial . Most business owners and financial managers aren't necessarily aware of the methods and factors that banks utilize to control and monitor their business loan facilities with commercial customers. We are talking about essentially two types of bank financing in Canada, term loans, and also operating lines of credit, also called 'revolvers' by some. (Revolver - the credit line revolves, it goes up and down on a daily basis...)
THE BANK STRATEGY / BANK LOANS FOR BUSINESSES
Banks essentially use several different strategies to ensure they have maximum control and influence on the small business loan borrower looking for a loan for a business.
Banks often are reluctant to allow maximized borrowing from other parties for asset growth. Why? This is because when a customer has to service the additional non-bank debt they might be unable to service the small business bank loan.
IT'S ALL ABOUT THOSE RATIOS AND COVENANTS
Banks have very well-known and published cash flow ratios when it comes to small business loans and they want to ensure their customers can meet these ratios on the bank debt. Naturally, if a bank feels comfortable with customer growth and cash flow profits they are much more likely to approve a third-party financing. If they aren't comfortable they may ask the company to at lease temporarily defer bonuses, dividends, or, in the case of a public company, a stock repurchase.
NURTURING BANK RELATIONSHIPS
Bankers of course usually know the company very well, as a relationship and financial history have developed over the years. They will often want to have input into the company's growth direction in an effort to ensure the customer is not going down a path that in their opinion, might lead to liquidity loss or profitability loss. This sort of 'advice' from a bank can come in a number of manners, one of which is simply providing debt to equity ratio that cannot be overlooked by the customer.
Business owners know that it is no one's best interest for the bank to trigger a default on a business loan - it's clearly a case where both parties have a lot to lose. However, if a bank feels on a number of fronts that the customer is spiralling downward they will take steps to ensure their loans are provided for.
3 KEY AREAS OF BUSINESS FAILURE TO AVOID!
What are some of those downward spiralling scenarios? They include:
Cash flow deterioration
Asset erosion
Working capital problems
HAS YOUR LOAN BEEN CALLED
Again, the worst-case scenario is the bank 'calling the loan '. We have agreed that this benefits no one, so the bank usually prefers (as does the customer!) to return to the bargaining table. At this time business owners are strongly cautioned to prepare a corrective action scenario to satisfy the bank. It is at this time that the bank normally considers an interest rate increase or more restrictive covenants.
MATCHING FINANCING NEEDS TO THE RIGHT LOAN TYPE/TERM
We also want to point out to business owners that banks want to ensure that there is a proper ' matching ' of financing. By that, we mean that the bank does not want the customer to borrow short term to finance long term scenarios. For this reason, working capital ratios are put into place.
Finally, banks utilize what's known as a 'negative pledge 'clause. This forces the company to consult the bank when pledging other assets or selling unencumbered assets. If such sales are agreed to the proceeds are usually used to pay down the bank.
IS A BANK GOVERNMENT LOAN SOLUTION FOR YOU? THE SCOOP ON GUARANTEED GOVERNMENT LOANS
Business owners should investigate the Canada Small Business Financing Program which is sponsored by Industry Canada and has financial institutions such as banks and credit unions administering the government-guaranteed loan program, often called the ' SBL Loan'. Interest rates, as well as general terms and conditions and flexibility under the program, are excellent - the majority of business owners seem to be focused on the ' interest rate ' we've found here at 7 Park Avenue Financial! The program competes with a bdc small business loan offered by that separate crown corporation.
The maximum loan amount under the program is a lump sum loan currently up to $1,000,000.00 with certain conditions - as an example, your revenues must be under the 10 million dollar cap for an established business. There is a one-time registration fee in the program and you may apply anytime you are prepared to acquire equipment, real estate, or undergo leasehold improvements - those three asset categories are the key elements of the program - allowing you to access commercial loan rates that match your needs.
To get a business loan, unsecured or otherwise owners should be able to demonstrate good credit and an acceptable credit score - In Canada 650 is typically the required personal credit score in business credit term loans as well as other financing solutions such as business credit cards. Rates on any type of bank financing can typically be either fixed-rate or variable rate.
NEED A BUSINESS PLAN? HOW TO APPLY FOR A BUSINESS LOAN
In any type of business funding, you are applied for a business plan either helps or is required. It demonstrates the care and thought you are putting into your venture. 7 Park Avenue business plans meet and exceed the requirements of banks and other commercial lenders. Requirements for business loan solutions will vary with the type of financing and amount of funding you require.
CONCLUSION
In summary, it benefits business owners to understand the whys and wherefores of business loans and Canadian bank strategy and influence and control around business loan scenarios. Understand where the bank is coming from allows small businesses to more proactively plan financing growth with a view towards successful financing.
Seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with your business capital needs.
Click here for the business finance track record of 7 Park Avenue Financial
Stan Prokop
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