The Canadian banking system is full of checks and balances, with many covenants and regulating guidelines designed to protect businesses, banks and their shareholders from losses, fraud and security breaches. While not all business owners consider this oversight to be a benefit, many are quietly appreciative of the fact that such protections are in place.
Many Canadian companies are subject to an annual review by their banks. Depending on their industry, company dynamics and strength, some companies are also subject to more frequent examinations. When preparing for these reviews, it’s helpful to remember their purpose: to ensure that the company is on sound footing and can repay its loans.
Whether you’re going to ask for more financing or are simply defending your current loans, here’s some insight about what banks are looking for:
“Cash is king,” the old saying goes, and it’s true. Given the past few years of economic uncertainty, banks have been particularly focused on a company’s ability to service its debt and repay current obligations. As you show your banker your books or your business plan, keep in mind that your lenders will want to see an appropriate amount of cash.
Personal guarantees —
Some business owners are put off by a bank’s suggestion that they personally guarantee their loans. But personal guarantees are now a fact of life. Don’t be surprised if your lenders expect you to share their risk.
Solid plans —
When bankers approach their institution’s internal credit adjudication group to discuss a loan, it’s expected that they will be able to speak about a company’s short- and long-term plans, including everything from operations to sales and marketing. A thorough strategic plan helps demonstrate that you’re thinking ahead and taking realistic steps toward future success.
Strong management —
Like investors, lenders often feel that the past is a strong indicator of the future. Banks like to know that their money is in the hands of capable people who make good decisions. An experienced management team, along with a viable succession plan, is a plus when it comes to impressing bank personnel.
Lenders don’t like surprises, so make it a point to openly and frequently communicate with your commercial account manager, both in good and bad times. Honesty and openness build trust and credibility and go a long way in times of trouble. Don’t hesitate to reach out to your banker if you have any questions or concerns.
Of course, your account manager may change over time. For this reason, it’s wise to get to know a few people at the bank, both up and down the management ladder. And while you may think it’s a new account manager’s job to get to know you, it’s not a bad idea to be proactive and ask him or her for a meeting or a lunch to discuss your business.
Remember, your trusted advisors — including your bankers — have worked with many other business owners and executives. They have seen a number of successes, failures and trends and are more than happy to share the lessons learned with you.
DJB is glad to offer our input and advice on financial matters. If you would like to discuss your financing or banking relationship in more detail, please contact us.