It is still possible to obtain financing in today’s market, but a well-structured plan is in order. The plan should consist of a strategic message to the bank as to why the financing is required and how the funds will be used. If the financing is simply to fund current and prior year losses, it is more likely than not that the bank will decline. However, if the funds are used to purchase additional inventory, pay off previous management or acquire new equipment, the bank is more apt to provide financing.
Business owners are sometimes so surprised that the bank is willing to provide financing, and so focused on the interest rate and loan-to-value ratio of capital property, that they forget to read the fine print on their credit facility agreement. Often there are significant terms in the credit facility that are overlooked by the business owner until it is too late. Commonly overlooked terms address personal guarantees, postponements, financial covenants, audited financial statements, and significant security.
Personal guarantees come into play when a business can no longer continue to operate and the bank calls the loan. If you have an agreement with a personal guarantee and there is not enough cash to repay the bank loan, the bank can seize your personal assets (i.e. your house!) as repayment.
Postponements require that the company postpone repayment of debts in favour of repaying bank debt. This term can be detrimental if your business runs into trouble and you have personally put significant funds into the business.
Financial covenants also pose a risk in that sometimes they can be impossible to meet and 1-3 years after the facility agreement is signed, the covenants may be breached and the bank can call the loan.
The terms may indicate that you will be required to provide the bank with audited financial statements within a specific period following your company’s year end. Audits can be costly, and you may be able to negotiate to submit reviewed financial statement (lower assurance than audited statements) which can save your company some money in accounting fees.
Another problem I see is business owners who don’t explicitly ‘shop’ around to different banks and compare terms. It is important to create a chart to compare the terms offered by different banks because more often than not facility agreements, especially for auto dealers, have a significant number of terms that are not easy to compare in your head. I suggest you write out the differences and compare all the options to make a decision based on the facts. Some points of comparison may be qualitative in nature, such as the reputation of the bank or relationship with the banking representative.
This is just a taste of what I have dealt with over the last several years with regards to capitalizing your business and I plan to write further blogs on this topic.
-- David Hertzog
“Often there are significant terms in the credit facility that are overlooked by the business owner until it is too late.” – This is most often the common problem that business borrowers experience. It is critical to analyze and understand each term written in the credit facility statement. Know your rights, limitations and important matters that are covered within the agreement. Remember that it is your reputation and business success that are at risk here.
ReplyDeleteCameron Scott @ CONVERGEX