According to the Canadian Bankers Association, the number of small and medium-sized companies that have approached their banks in the last year to refinance or renegotiate their borrowing facilities has risen by more than 47%. Unfortunately, many of the Chartered Banks and other financial institutions have been less than willing to engage in discussions. Why?

I interviewed a number of these mid- sized companies and discovered that many of them were not prepared for these discussions. Most, if not all of them, did not have the necessary information available for their clients. Since many circumstances have changed over the course of the last year, the information required can not be assumed by the borrower.

Here is what is important to your bank if you want to engage them in a serious and new dialogue:

1. Capacity

The capacity of the borrower to repay is the most critical consideration in any banking relationship. The prospective lender will want to know exactly how you intend to repay the loan. The lender will consider the cash flow from the business, the timing of the repayment, and the probability of successful repayment of the loan. Payment history on existing credit relationships – personal or commercial -is considered an indicator of future payment performance. Prospective lenders will also want to know about your contingent sources of repayment.

2. Capital

Capital is the money you personally have invested in the business and is an indication of how much you have at risk should the business fail. Prospective lenders and investors will expect you to have contributed from your own assets and to have undertaken personal financial risk to establish the business before asking them to commit any funding.

3. Collateral

Collateral, or guarantees, are additional forms of security you can provide the lender. Giving a lender collateral means that you pledge an asset you own, such as your home, to the lender with the agreement that it will be the repayment source in case you can’t repay the loan. A guarantee, on the other hand, is just that -someone else signs a guarantee document promising to repay the loan if you can’t. Some lenders may require such a guarantee in addition to collateral as security for a loan.

4. Conditions

Establish the focus and intended purpose of the loan. Will the money be used for working capital, additional equipment, or inventory? The lender also will consider the local economic climate and conditions both within your industry and in other industries that could affect your business.

5. Character

Character is the general impression you make on the potential lender or investor. The lender will form a subjective opinion as to whether or not you are sufficiently trustworthy to repay the loan or generate a return on funds invested in your company. Your educational background and experience in business and in your industry will be reviewed. The quality of your references and the background and experience levels of your employees also will be taken into consideration.

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