COMMERCIAL BANKING
Challenges When Seeking Commercial Bank Financing
BY: GARY BELDING, BELDING BUSINESS FINANCING SOLUTIONS
You may wonder why your friendly banker says“ No” to approving new credit for your business. In my prior articles— Put on a Banker’ s Face( Spring 2012), Small Business Financing( Fall 2013), and Why Businesses Fail( Fall 2015)— I referenced some key ingredients to consider when you are seeking financing and what considerations can derail your financing request.
Over the years, banks and other lenders have changed certain policies and procedures when considering financing for small business. However, certain criteria continue to exist, such as the four Cs for granting credit: Credit( credit rating and history with the credit bureaus), Capacity( ability to service the debt, which include debt servicing ratios), Character( the individual and his or her relationship with the bank), and Collateral( security for the indebtedness).
Think of credit and capacity as the gatekeepers of credit. Character and collateral are only considered once credit and capacity are deemed solid. Banks have always insisted loan security does not cover the real cost of a bad loan, considering the time and costs in realizing on the security. Maintaining strong personal credit is important when seeking financing for your small business. History is a strong predictor of future behaviour which is why maintaining a strong credit history is paramount. There will always be a direct link between the individual and his or her
small business.
Here are some of the issues that will adversely affect your credit and capacity and ultimately impact your ability to secure bank credit for your business:
• Recent bankruptcies, judgements, liens, outstanding taxes such as arrears with harmonised sales tax, and individual and corporate income tax arrears are a shining red light. These encumbrances can take priority over bank security. These obligations would need to be resolved prior to new credit being issued.
• The bank may require both spouses sign certain security documents. Banks and other lenders may not extend credit if one spouse has adverse credit.
• Errors on your credit report will affect your credit and capacity.
• High existing debt load, high authorised credit limits, and late payments reflect poorly on your credit and capacity.
• Cheques returned as a result of insufficient funds, constant overdrafts, and unauthorized overdrafts set the stage for poor credit.
• Overdue trade payables and old outstanding loans will raise red flags. Attempting to refinance existing corporate debt is a tough sell.
• Businesses that have incurred operating losses for the past two consecutive years will negatively affect their credit and capacity, impeding the bank’ s willingness to participate in new financing.
Banks are interested in building relationships. Banks and most lending institutions no longer compete solely on interest rates. Securing a new loan at another lender is less likely now than in the past.
When reviewing your company’ s financial statements, it is useful to pay close attention to the Statement of Cash Flows, if available. This describes the sources and uses of company funds, formerly the Statement of Change in Financial Position. The statement is a snapshot of how you manage your business operations. +
Gary Belding has worked in both the private and public sectors for over forty years and understands the world of financing. Gary has the experience, knowledge, and ability to navigate through the financial landscape and now operates his own business, Belding Business Financing Solutions( www. beldingsolutions. com).
8 | SPRING 2017