This article are provided for information purposes only, and are not intended as legal advice.


Bank financing – what do you need to provide the bank?

April 10th, 2009

Your business is expanding and you need more working capital.  You go to your bank and they say that they will not lend you more money, what do you do?  Prepare to go to another bank.  All banks may have similar criteria but there portfolio of loans is different.  Some my prefer more of one industry than another because they are trying to balance their loan portfolio.

 

What are banks looking for?  What your bank manager says and what credit says may be different.  One bank wants a certain loan to value ratio and another may be significantly different.  Recently one financial institution said that they will lend 85% loan to value based on their appraisal.  Their appraisal is 60% of market price.  The official 85% ratio looks terrific in writing but in practice the institution should have said that they are providing based on 60% loan to value instead of playing games. Banks these days are looking for cash flow.  Do you have enough to service the bank loan?

 

Banks look for a debt to equity ratio between 2 to 4 for many private companies.  The  ratio depends on the industry and can be higher or lower depending on particular business.  Banks often look for consistency.  What you have done in the past, what are you doing today and will that be the trend in the future considering the changes to the economy. 

 

You will need projections, a business plan if it is a new business, historical financial information and internal financial statements. If you are a start up, unless there is a government program such as the SBL program in Canada, the bank will not lend on projected cash flow.  This is more likely to be financed by angel investors of venture capital than a bank.

 

Depending on the size of the loan, you may be assigned to a particular person/branch if the loan is too small.  If you exceed say $250,000, you may be into what is refered to as relationship banking.  You can pick your account manager that you want to deal with.

 

Find a banker you feel comfortable with.  If he/she does not believe in you, how much enthusiasm will he have to submit your loan application.  If you have assets already and a good source of income, you may qualify for private banking. The private bankers may be able to structure loans in a different manner for a lower interest rate.  If you have real estate such as a house in a company, the branch will say that the company needs to go to corporate banking and corporate banking says you need a residential mortgage and you end up in never never land because the bank doe snot know what to do with your property.  You fall between the cracks.  In private banking,there is no issue and the loan would be financed. 

 

If you are dealing with an accountant or lawyer, find out who they sent their clients to.  If there is a relationship with a banker already, they may go the extra mile for you because they want additional deals to come down the same pipeline.  in the business world, it is not always what you know, it is often who you know to get in the door.


Filed under: Banking — Gary Landa @ 9:06 am


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