When most Canadian business owners and financial managers think of commercial finance in Canada commercial bank financing comes up logically as the ‘ go to ‘ solution. That seems logical because probably for many decades in Canada it was the only solution. In recent times financing alternatives via bank competitors have proliferated. Let’s examine some key aspects of Canadian chartered bank commercial financing, and perhaps some alternatives… who knew!
Borrowing from a chartered bank in Canada comes under two categories for most small to medium sized corporations … term loans and revolving lines of credit. Banks are very focused on your cash flow for the simple reason that it, plus additional collateral that is pledged, becomes the source of repayment.
It is well known that the Canadian chartered banks have pretty well the highest reputation in the world for being well run, profitable, and soundly capitalized. That becomes a double edged sword when you are a borrower looking for commercial bank financing , for the emphasis on your overall credit risk, assets, cash flow coverage , and personal guarantees of shareholders is somewhat intense !
When your lines or credit or term loans can’t be repaid in the eyes of the bank then you’re deemed ‘ none performing ‘… (Even though you’re working as hard as ever!) .
Over times business owners realize that a lot of the financing they need might not be accomplished by a Canadian chartered bank because of the significant emphasis that is placed on the rear view mirror. What do we mean by that?! Simply that your past financial performance is often a huge part of the overall bank approval decision for your new financing. So even if you have great prospects, new contracts, new owners, new equity, etc, etc, etc the reality is that last years financial losses, or negative cash flows or some other incident in fact will probably preclude you from being approved, at least in the amount that you might desire.
But of course being approved by a commercial bank in Canada for the financing you need pretty well means you are achieving the best finance rates and terms in the country. The banks low returns on commercial borrowers (because of those low rates) are compensated by the low risk they take.
When clients talk to us about focusing on a traditional Canadian commercial bank financing it is our advice that they totally disregard rate (because as we said, there isn’t any better) and instead focus on the ratios and covenants and personal guarantee that make up your financing approval.
And what about those alternatives and competitors to Canadian chartered banks .Over the last 10 -20 years a number of very solid alternative finance offerings are available to you the Canadian business borrower. They include asset based lending via non bank credit lines, confidential receivable financing, equipment financing for new and sale leaseback scenarios. Even more alternatives are available, including purchase order financing, bridge loans, and private equity.
In many cases a lot of the banks actually have started new divisions to compete with these new competitors – however typically in our opinion their same credit standards are in place; that is to say it’s not a bad thing, just the same challenge of getting approved within a bank offering.
Want to discuss commercial bank financing, or an alternative via competitors to the chartered banking industry in Canada? Speak to a trusted, credible and experienced Canadian business financial advisor who can work with you to achieve proper financing for your firm.