Last issue the president of a small Ontario manufacturer wrote to ask PROFIT-Xtra readers:
“We applied for a loan through the BDC in partnership with one of the big Canadian banks. The bank’s commitment was less than one-third of the total. We have no debt and therefore no credit track record. So no track record, no loan. How do we overcome this kind of an objection?”
Best reader responses
Allan Shaw, NEXX Step Solutions:
Lessons from our past can often be a detriment to our future growth and success. We’ve all been told that debt is bad and that you should get rid of your debt as soon as possible — or, better yet, be completely debt-free. Unfortunately, the financial sector hasn’t effectively distinguished between good and bad debt, and how the efficient use of debt can actually be advantageous to your success. For it’s by effectively managing debt that you can establish the credit history you’ll need to secure loans in order to grow your business.
Every business and business owner should have an unsecured or secured line of credit registered against his or her business. This financial product offers several opportunities for fiscal and financial-planning strategies that can enhance your business. A credit line can provide emergency funds for unexpected expenses, provide the opportunity to leverage the funds to purchase new or additional equipment and, most important, allow you to establish a credit history — but only if you use the credit line correctly.
You can start to establish a credit history by using the credit line, rather than the traditional company account, to pay several of your recurring monthly operational expenses and those to your suppliers. That’s what a credit history actually is: an established pattern of making regular payments on their due date.
Provide a clear business plan detailing how you’ll use the funds, the impact the monies will have on your company’s operations and exactly how and when you’ll repay the loan. Financial statements for your company that indicate a healthy and profitable business with solid owners’ equity will be very helpful.
The bank will usually require that you make a personal guarantee, although you should strive to have this limited to a specific dollar amount. Thus, the owners’ liquidity and net worth will be a major consideration in the credit decision. Another major consideration will be the lender’s security requirements for the loan amount.
If the financing is for equipment, a loan from the Canada Small Business Financing program through Industry Canada might form part of the borrowing solution. And if your lender reduces the loan amount based on any aspect of the above criteria, I would ask the lender to clarify its reasons for doing so.
Daniel O’Toole, Phoenix Systems:
One method that I used recently to raise capital during an acquisition was to go to the leasing marketplace. Our bank was able to provide about 65% of our funding requirements, but several leasing organizations stepped up and provided an additional 15%. They funded capital equipment and software licenses that were required to support the acquisition.
Credit requirements for leasing may be less onerous than those from other financial institutions, and they’ll immediately create credit-worthiness information.
For his answer, Daniel O’Toole will receive a copy of Benjamin Graham on Investing: Enduring Lessons From the Father of Value Investing, edited by Rodney G. Klein.
Watch for another Peer-to-Peer question in the next PROFIT-Xtra.