Approaching Your Banker

Tips

1. Keep in mind that to stay in business banks need to make loans. Do not be afraid to ask for one. That is what the Commercial Account Manager wants you to do. To increase your chances of getting a loan, look for a bank that is familiar with your industry and who has done business with companies like yours. Seek out banks that are active in small business financing. Some banks lend on a conventional basis (lending money without government support), while some banks participate in government programs (in the form of government participations involving direct government funds or loan guarantees). However, be aware that banks often demand stiff collateral requirements for start-ups.

2. As an entrepreneur, make sure that you are thoroughly prepared when you go to your banker's office to request a loan.

You need to show your bankers that a loan to you is a low-risk proposition. Have on hand a completed Business Plan

• Management• Markets• Materials• Money • Copies of cash flow (12Mth)• Financial statement projections (3-4yrs)

3. Learn to anticipate every question that he or she has. Remember, the combination of information and preparation is the most powerful negotiating tool in the world. A confident and thoroughly prepared borrower is four times more likely to have his or her loan approved than a borrower who does not know the answer to some of the basic questions a banker asks. To show the extent of your preparedness, your business plan should also include answers to your banker's questions.

These questions normally are: 

• How much money do you need? Be as exact as possible; although adding a little extra for contingencies will not hurt. 

• How long do you need it for? Be prepared to go into detail about what the money will do for you and why your business is a good risk. 

• What are you going to use it for? Businesses use loans for three things: to buy new assets, pay off old debts, or pay for operating expenses. 

• When and how you will repay for it? Your cash flow projections should provide a repayment time frame. Convince the banker of the long-term profitability of your business and your ability to repay the loan by using your financial projections and business plan. 

• What will you do if you do not get the loan?  • Is your request Safe and Sound. 

4. Do not take an apologetic and negative attitude. Keep your negativity in check. Present yourself as an entrepreneur who can and will repay the loan. Boost your image by providing your Commercial Account Manager with any promotional materials about your business, such as brochures, ads, articles, press releases, etc. 

5. Dress in a professional manner for the interview. This is a business transaction, so treat it as such. 

6. Do not stretch the truth in your loan application. Broad, unsubstantiated statements should be avoided. The lender can easily check many of the facts on your application. If you cannot support statements with solid data, then don't make them. Do your homework and spend time doing research to be able to support everything you say, including every single number in your projections. It is best to keep projections, assets lists and collateral statements on the conservative side

7. Be sure all your documents are neat, legible and organized in a cohesive and attractive manner. Type all your loan documents. Handwritten documents look unprofessional. Don't forget to include a cover letter. 

8. Do not push the Commercial Account Manager for a decision. Doing so might result in a rejection. Your banker cannot make a decision until all your documentation is complete. To ensure a speedy decision, make sure that your application is complete. 

9. Be confident. An attitude of confidence enhances your chance of getting the loan. Show that you can make a success out of the money that the bank will lend to you. Visualize in your mind the positive results of your bank application.

• 10. Don't Give Up.  To improve your position as you change bankers and banks, the best way is to ask for a referral from a successful entrepreneur. Before you decide to approach a bank directly, find an associate, friend or acquaintance that is in good standing with the bank to give you a good referral. Bankers tend to deal more favorably those who were referred to them by their best customers. 

• 11. Failure to discuss risk in your application. You must remember one thing: there is no business without risk. If you do not discuss risk, the bankers will assume that you haven't thought about risk. Let's face it - try as we might, we cannot plan for everything, for every contingency, for every turn of events. Bankers would want to know if you have planned for the major risks and how you intend to manage it. 

• Then, there is also the risk of too much success. The demand for your products or service may exceed well beyond your expectations, and they would want to know how you intend to handle success.

• 12. Remember that the first loan is usually the hardest to get. Bankers prefer to lend money to borrowers who have borrowed at least once and have paid back at least one loan on time. They are not venture capitalists that make high-risk loans regardless of the profit prospects of your business.

How does the Bank analyse your Business Plan?

The 4 M’s of Credit

Management:• Experience • Succession Plan • Track record • MIS (Management information Systems)• Attitude towards the bank • Financial capacity of the Owners /

shareholders

Money: • Liquidity • Adequacy of WC, DSC, D/TNW • Sales record, Profitability • Commitment of Earnings • Any planned changes that will impact ratios • Loan amount VS Security available • If WC is tight, can the company sustain sales and carry

the cost of supplies, wages etc – especially during high growth periods

• Projections – consider how much WC is needed. Consider the length of the production cycle

• Projections need some due diligence. What research are they based on? What assumptions were made? Are the costs appropriately allocated to fixed vs COGS?

Markets:

• Market acceptance

• Demand

• Competition

• Market size

• Sales terms

• Dependence on 1 or 2 major players

Materials:

• Nature of Inventory

• Source of supply and continuity

• Length of manufacturing period

• Nature of costs

• Nature of fixed assets, single purpose, unique to industry

• Realization value of assets

Which of the 4 M’s has the most importance?

Canadian Small Business Finance Loan

• What are Canada Small Business Financing Loans?

Government guaranteed fixed or floating rate loans to assist small businesses to obtain term credit for a wide range of improvement and modernization purposes, granted under the auspices of the Canada Small Business Financing Act.

• What are the benefits to the clients?

Loans are tailored to borrower's needs and ability to pay.Prepayment is permitted on floating rate loans without penalty.Government guarantee affords additional protection so Bank can offer more flexibility.

• What are the features of Canada Small Business Financing Loans?• The maximum aggregate loan limit is $500,000 which includes: • the maximum loan limit of $350,000 for equipment and/or leasehold improvement • outstanding Small Business Loan Act (SBLA) and CSBFA loans • 2% registration fee (payable by the client to the government may be added to the loan), and • the maximum loan limit for real property or immovables (the total financing for real property or

immovables including as applicable the aggregate of the three items in the bullets above must not exceed $500,000).

• Maximum amortization available is 10 years.Flexible repayment schedules can be arranged.Commercial Loan Insurance Plan is available.Fully transferable between Financial Institutions.

CSBFA• What are the target markets of Canada Small Business

Financing Loans?

Commercial Customers: Independent Business with annual sales up to $5mm. Borrower is to meet eligibility requirements.

• How is this service priced?

• Floating Rate: Prime + 3.00% (Maximum). • 1.25% annual fee is payable quarterly by the Bank to the

government. • What are the qualifiers for Canada Small Business Financing

Loans?

Available in Canada and in Canadian dollars only.

Key Financial Ratio’s

• Liquidity– Working Capital ratio: Currant assets /Currant liabilities– Indicates if a firm has enough short-term assets to

cover its immediate liabilities.Things to remember

-If the ratio is less than one then they have negative working capital.

- A high working capital ratio isn't always a good thing, it could indicate a company has too much inventory

Leverage RatioWhat does Leverage Ratio mean?

• Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to measure its ability to meet financial obligations. There are several different ratios, but the main factors looked at include debt, equity, assets and interest expenses.

1. The most well known financial leverage ratio is the debt-to-equity ratio. For example, if a company has $10M in debt and $20M in equity, it has a debt-to-equity ratio of 0.5 ($10M/$20M).

2. Companies with high fixed costs, after reaching the breakeven point, see a greater increase in operating revenue when output is increased compared to companies with high variable costs. The reason for this is that the costs have already been incurred, so every sale after the breakeven transfers to the operating income. On the other hand, a high variable cost company sees little increase in operating income with additional output, because costs continue to be imputed into the outputs. The degree of operating leverage is the ratio used to calculate this mix and its effects on operating income.

DSCR

• What Does Debt-Service Coverage Ratio - DSCR Mean?1. In corporate finance, it is the amount of cash flow available to meet annual interest and principal payments on debt.

2. In personal finance, it’s a ratio used by bank loan officers in determining income property loans. This ratio should ideally be over 1. That would mean the property is generating enough income to pay its debt obligations.

In general, it is calculated by: Net Operating Income / Total Debt Service

Questions