The very first client-meeting I had as a commercial lender took place in my hometown. I had just taken over from a well-respected colleague and while I’d done all the necessary prep and didn’t have any concerns about the loan, I was nervous. I wanted to make a good first impression as I’d already heard that the client wasn’t happy at having to deal with someone new.
Typically, discovery meetings like this require 45-minutes of time. However, because Jim (not his real name) was uber-organized, we were done in less than fifteen. He literally entered my office with a banker’s box and placed it on the floor beside my desk. “It’s not my first rodeo, Norm”, he explained. He was leaving for Mexico the next day; the box contained everything he thought I'd need to avoid delay. With that, Jim and I got down to it: we talked briefly about how much he needed, why he needed it, and what sort of terms we could arrange. After a few moments, Jim was gone.
Amazed, I called my boss to share the experience. He laughed, and pointed out that I would never again have such a well-organized client.
He was right. I never did.
I was reminded of this experience this week while helping a client register and incorporate his new business. In the process of working together, we had some very good conversations about banking and how to have a good banking and borrowing experience. That prompted this month’s newsletter topic because if you’re a small-business owner and have never applied for a business loan, you may find the experience challenging.
Beware, Commercial Lenders ask a surprising number of questions. They do so because they have many things to consider before they can approve a loan and ‘write the credit’. As a result, your first meeting may feel more like an interrogation than an interview. However, even if it is your first rodeo, you can avoid surprise and give yourself a low stress borrowing experience. Here’s how:
Get Incorporated: Most commercial lending policies restrict commercial lenders from dealing with unincorporated businesses. Fees vary but a simple incorporation (through a lawyer) generally costs about $ 1,600 - $ 1,800.
The first 3-years: Incorporated or not, if your business is less than three-years old it will be challenging to secure credit, due to lending policy. If your company is less than two-years old, you’ll likely have to bootstrap your business for another year or more. After three-years, you’ll have passed the generally accepted time-in-business requirement and you’ll find that your lending conversations will be more productive.
Settle with the Canada Revenue Agency (CRA): CRA has priority over nearly every other creditor. As a result, (most) lending policies prohibit lending if there’s already an outstanding CRA bill. Save yourself the hardship - settle any CRA bills as quickly as you can and then approach your financial insitution.
Use a Chartered Professional Accountant (CPA): Again, it’s about lending policy (do you see the theme?) and most commercial lending policies restrict lenders from dealing with businesses who do not have their financial statements prepared by a CPA. Do yourself a big favor and confirm that your accountant is a CPA in good standing. The CPA Association of British Columbia contains a lookup page for both Firms and Individual Accountants, here’s the link: https://www.bccpa.ca/protecting-the-public/cpabc-member-firm-directories/. If you live elswhere, rest assured - there is a similar association where you can check credentials.
What to bring to your first loan meeting:
Standard Bankers Package: When you incorporated, you received a “Banker’s Package” which contains critical information about your company: Certificate of Incorporation, Notice of Articles, Register of Directors, and the Central Securities Register. These documents may not mean much to you but, without them, your lender will be unable to move forward. Even if your bank already has copies of these documents, they might be out of date so save yourself time and bring your Bankers Package with you.
Financial Statements: Typically, you’ll be asked to provide three years of Financial Statements (Income Statement and Balance Sheet). As mentioned, the statements should be prepared by a CPA. Using a CPA provides comfort that your finances have been reviewed by a professional and are presented in accordance to Generally Accepted Accounting Principles (GAAP). If it’s been several months since your last year end, you’ll also be asked to provide year-to-date (YTD) financials – a print-out from your accounting software usually satisfies this YTD requirement.
Do you need a business plan? Really, it depends on who you ask and how much you wish to borrow. I have a lending colleague who sums it up this way. “I don’t need a business plan, but I do need to know that the 5M’s of Management have been answered: Money, Man, Materials, Machines and Method.” So, if you have a business plan that accurately captures your business, bring it with you. If you don’t have a business plan, a short write-up will be helpful. Be sure to describe the business, who is managing it, what projects you’re working on, and why the funds are necessary. This will keep the conversation going.
Your lender will study your financial statements. You should too. Your ability to analyze and speak confidently to your own financial numbers can be life altering – in the sense that it could be the difference between getting a loan approved or not. If you’re not confident discussing your financial statements, it’s okay! You’re not alone!! If you need help, there are plenty of online resources or just give us a call.
Do your Homework: Often, borrowers don’t ask for enough. Sometimes, it's because they're afraid to ask for more. Sometimes, it's because they haven't thought things through. For instance, when requesting a loan to acquire new technology, it’s easy to underestimate the amount of training that’s required, or the building improvements needed to accommodate the new equipment. Do the homework before hand. Get familiar with both the costs and the benefits of upgrading. This way you’ll not only have a handle on your numbers. You’ll be able to speak confidently to them when asked.
Other documents: Your lender may also ask you for a Cash Flow Forecast. This will require some time to pull together, and you will likely resent the exercise. I get it. However, it’s a great exercise as it will illustrate to both you and your lender where the potential cash crunches will be in the future. (After all, not every client will pay within 30-days.) I recommend doing a cash-flow forecast and sharing it with your key staff, doing so will make them better managers.
I’ve referred to lending policy several times. Each financial institution has it's own lending policy, and these policies are subject to change. This is especially important to remember during times, like now, when interest rates are on the rise or there’s been big movements in a dominant sector - here in British Columbia, the forestry sector is a good example.
Have faith - lenders WANT to lend. Lenders WANT to do the deal so stay close to the phone. There will be follow-up questions. Lenders won't spend time on a commercial loan application if they don't think it can get approved. So, if you treat the follow-up questions as positive signs and respond quickly, your lender will stay focused on your application and not move on to someone else’s. Jim, made my job easy by supplying nearly all the key information I needed, up front. He saved us both a lot of time and the loan was completed quickly with few very call backs. Smooth, like buddah!
Finally, you may be surprised to learn that commercial lenders perform a surprising amount of advocacy work for their clients. Seldom will they share how (or how many times) they’ve re-written a portion of their application to satisfy their own Risk Department in the quest to get an approval. Their job requires financial acumen, good writing skills, good computer skills, and the ability to debate and negotiate on your behalf. If you take time to get organized before the first meeting, you'll have a much better borrowing experience.
Norm Adams, MBA, is a Certified Professional Business Coach with more than 25-years business experience in both Canada and the US. His first personal loan, for a car, was 12.4% in 1991. Yikes! Give Norm a call today – he was recently named the 2023 Business Coach of the Year by the Professional Business Coaches Association of Canada. Norm can be reached directly at firstname.lastname@example.org