Where do companies turn for financing if they are looking to start a business or expand their current operations? Perhaps companies could secure required funding through a venture capitalist, or more traditionally, by securing a business loan from a bank. However, when faced with today’s economic realities, it may be harder than ever to secure a loan from a bank, especially when there are factors built into the loan formula that make it harder for higher risk industries to be approved for loans.
In the following look at how Canadian banks work with printers, we will examine the key information Canadian banks look for to help a business secure a loan, hear from the owner of a Canadian printing company who has dealt with banks for the last 28 years he’s been in business, define four different types of bank business loans and lastly, describe a variety of financing options available to Canadian small businesses through the five major chartered banks.
Fundamental information to help secure a Canadian business bank loan
CanadaOne is an online information source for Canadian start-ups and small businesses. Contained within one of their resources about securing loans with Canadian banks, they highlight key sources of information that will increase a business’ likelihood of being approved for a loan.
Loans are most often assessed based on two important ratios to evaluate cash flow and the ability for the business to repay the loan. The first is the ‘debt to equity ratio’, which demonstrates your businesses’ ability to pay off the debt. Lenders typically understand that a debt to equity ratio of more than 2:1 is a risk (i.e. the company is carrying more than twice as much debt as it has equity). Secondly, ‘current ratio’ compares a company’s current assets to their current liabilities. CanadaOne suggests that if your company’s ratios look inconsistent with other businesses within your industry, you must be prepared to explain why they are that way to the bank. Remember that most loan applications can now be completed online; therefore automated applications can provide a nearly instant approval or rejection notification. If your numbers do not paint a clear, profitable picture, speak to a bank loan officer in person.
For many banks, the owner’s personal credit history is still the most important factor to determine loan eligibility. It is also critically important to prove how your new business is viable or how your existing business is profitable and has the ability to pay back the loan. It is significant to note that banks also look at cash flow, or in other words, how long a business can sustain itself without the bank’s help.
A business’ history and the right leadership are other essential, less tangible, factors in securing a loan. The commitment of the business owner to see the business succeed must be quantified. Ultimately, the bank wants to see equity and profit in the business, which will increase its chance of securing financing.
One printer’s experience in dealing with Canadian banks
Canadian banks do a great job presenting the small business loan options to consumers via their websites, and they make it seem simple for small business owners to obtain a loan. Seemingly, any entrepreneur with good credit history would have a fair chance at securing a loan; however Michael O’Connell, Owner of Canadian Printco Limited, has had a different experience trying to secure financing from Canadian banks.
O’Connell has been in business for 28 years and when he bought his company in 1984 he put up half of the money and the bank put up the other half. “When I was in business school, banks were a place to go raise capital,” O’Connell explains. “Now it’s only if you’re a sure bet.”
O’Connell describes that working with Canadian banks “went from being a relationship, whereby your knowledge, experience and track record counted to where it’s just a formula and it doesn’t matter who or what you are.”
O’Connell reveals that in 2008, banks stopped dealing with small business financing all together. ” There are times when I feel great pride for how the Canadian banking industry has helped Canada through rough economic times, but it is because they have done so little for small businesses (including printers).”
He explains that there is no competition beyond the five major chartered banks in Canada, creating an oligopoly that is not favourable for small businesses. He states that the Business Development Bank of Canada (whose mission it is to “help create and develop Canadian businesses through financing, venture capital and consulting services, with the focus on small and medium-sized enterprises”) is also very risk-averse and is now not willing to finance a loan unless one of the chartered banks would offer the same deal. “They are more difficult to deal with than the chartered banks and they have higher interest rates.”
O’Connell has a more pragmatic idea to stimulate economic growth through small and medium-sized enterprises: “have the government set aside a sum of funds in which no company with 100 employees or more can borrow. Restrict the amount a company can borrow to $250,000 and take some risks. Even if [the government] loses half; let people who actually run companies expand and grow. Small companies create the greatest numbers of jobs. Instead of every one of the deals having to be perfect, let’s invest in the people that are at least 50% likely to succeed. The multiplier effect for those who succeed would be astronomical. It will help get the economy rolling.”
Ultimately, chartered banks have many small business loan options, however it is clear that printers may face barriers when it comes to working with Canadian banks. In order to increase your business’ chances of approval when applying for a bank loan, have clearly laid out financials that describe your business’ ability to make money and pay back the loan, including a financial picture demonstrating the owner’s commitment to see the business succeed. Speak to a third-party financial advisor to seek further advice.
Here are a few important borrowing terms and their definitions.
Line of Credit – an agreement between borrower and lender (typically a bank) that establishes the maximum loan that the lender will provide to a specific borrower on an ongoing basis. The borrower is typically only charged interest on the amount withdrawn from the line of credit.
Term Loan – a loan for a specific amount over a specific period of time that typically matures between one and ten years from inception. Variable, or floating, interest rates are used to calculate interest for term loans.
Secured Loan – a loan that is backed by the owner’s assets, therefore it is less risk for the lending institution. If the borrower fails to make payments, the aforementioned assets may be surrendered to the lender.
Unsecured Loan – a loan that is not backed by any collateral, therefore it is a higher risk for the lending institution.