Key takeaways
- Lenders are looking for the ability to repay, the security behind the loan and a management team that knows its numbers.
- Clean year end statements, current interim statements, a cash forecast and a clear use of funds are the core of every package.
- Match the facility to the need: operating lines for working capital, term loans for equipment and long-lived assets.
- Start the conversation before you need the money, and keep the lender informed after you have it.
A bank loan or an operating line is the cheapest capital most growing companies in BC will ever have access to, and the application is usually easier than owners expect, provided the numbers are in order. Lenders say no most often not because the business is weak but because the package is incomplete, late or inconsistent.
This guide covers, in general terms, what lenders look at and how to prepare. It is not advice on any specific product, and the final structure is always a conversation between you, the lender and your CPA.
What the lender is actually assessing
Every credit decision comes back to a few questions. Can the company generate enough cash to make the payments comfortably, with room for a bad quarter. What security supports the loan, such as receivables, inventory, equipment, property or a personal guarantee. Does the management team understand its own business well enough to see trouble coming. Has the company behaved well with credit before.
Lenders express the first question through ratios comparing cash available for payments to the payments themselves, and comparing total debt to equity. Your CPA can walk you through how your statements will look through that lens before you apply.
Match the facility to the need
An operating line of credit is for working capital: the gap between paying staff and suppliers and collecting from customers. It is meant to rise and fall during the year. A term loan is for assets that last, such as equipment, vehicles, leasehold improvements or an acquisition, and is repaid over a period that fits the life of the asset. Using an operating line to buy a truck or a term loan to fund a permanent working capital gap are two of the most common mismatches we see.
Be specific about the use of funds. A clear statement that the money buys a particular asset or funds a particular growth plan, with the cash forecast to show how it is repaid, is far more persuasive than a general request for growth capital.
Where a company needs both, ask for both, structured separately, rather than stretching one facility to cover two purposes.
The package to prepare
Everything in the package has to agree with everything else. If the forecast shows revenue the interim statements do not support, or the aging does not tie to the balance sheet, the application slows down and confidence drops.
- The last two or three year ends prepared by your CPA, at the level of assurance the lender requires
- Current interim statements, usually within the last ninety days, reconciled and consistent with the year ends
- A receivable and payable aging, and an inventory listing if inventory is part of the security
- A twelve-month forecast and a 13-week cash flow showing the facility being used and repaid
- A short description of the business, the owners, the management team and the use of funds
- Personal financial information for the guarantors, which the lender will request directly
How to run the conversation
Approach the lender before you need the money, ideally when the company has just had a good quarter and the books are current. Bring the package, explain the business in plain language and answer questions directly. If there is something awkward in the history, such as a loss year or a tax arrear that has since been cleared, raise it yourself with the explanation. Lenders dislike surprises more than they dislike problems.
Expect the lender to ask about the industry, the customer base and what happens if the largest customer leaves. Prepare a short answer for each, grounded in the numbers in the package. Lenders also pay attention to how the owner talks about cash. An owner who can describe the next thirteen weeks from memory, and who knows which customers pay late and why, is demonstrating the management capability the lender is trying to assess.
After the facility is in place, read the covenants and reporting requirements, put the reporting dates in the calendar and send the lender what they ask for on time. A lender that receives clean quarterly numbers without chasing is a lender that says yes faster next time.
Reasons applications stall
- Books that are months behind, so there are no credible interim statements
- A forecast that does not reconcile to the historical statements
- Remittance arrears, which lenders treat seriously
- Owner draws and shareholder loans that are not explained
- Asking for the wrong type of facility for the need