Bashing the big banks is one of Canada’s favourite sports, slightly behind hockey. Private business owners have legitimate complaints about our banks, amongst them: multiple, irritating excessive fees; lack of understanding of small business; and frequent changes in account managers.
But one misconception is that banks don’t want to lend. In fact, banks do want to lend. Banks don’t make money by hoarding cash in their vaults. They have to lend. Your local account manager is recognized and rewarded based on the size of his/her loan portfolio. He or she is under pressure to lend more.
However, despite the push to grow, banks only want quality loans. Ones on which the interest will be paid and the principal retired. Banks have criteria against which to assess the financial viability of loans. They want security to back the loan to ensure the principal is repaid. Banks tend to favour physical assets for security, such as real estate with multiple use buildings in a good location. Having solid net working capital, such as collectable receivables and saleable inventory, provides additional security, and against which banks may provide loans. Banks also want to see reliable, steady cash flow so they know the interest will be paid and that loan instalments can be met.
While banks need to lend to stay in business, their appetite for lending does fluctuate with economic cycles. When the economy is booming, their willingness to finance business rises and their lending criteria will loosen, slightly. In economic down turns, banks become more stringent and raise the borrowing conditions. Even in stable times, banks may decide not to lend to certain business types or industries for a variety of reasons.
Within the context noted above, most banks want to further develop their private enterprise business. Some banks have major marketing initiatives to attract business owners by packaging personal and business banking services. Most banks offer a wide spectrum of services supporting private companies, including seminars on hot topics, such as writing business plans and on line tools for cash flow forecasting. They are all trying, with mixed success, to develop account managers that understand private businesses and the challenges their owners face.
Rather than scorned, your banker should be embraced. We will suggest how to do that in an upcoming blog about treating your banker as a ‘favoured customer’. At a future date we will also talk about when is the best time to ask for a loan. The answer may surprise you.