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