Toronto Lawyer - How to Increase Your Chances of Getting a Loan

Do you ever feel like your business cannot expand because you lack the necessary funds? You are not alone. Statistics show the faster your company grows, the more under-financed it becomes. In Canada, we tend to look to the banks to help solve our funding problems.

However, studies show that small business loans have been decreasing for the past 15 years. This is especially true for entrepreneurial businesses with fewer than 20 employees who may not always see eye-to-eye with an institution like a bank. As you may have experienced, this means that your attempts at financing have been met with pain, aggravation and frustration. How do you eliminate this pain and avoid the struggles of an underfinanced business?

One of the keys is to unlock the seemingly secret language of bankers. This newsletter is about understanding “banker talk” and, in doing so, learning how to increase your chances of getting a loan.

So what’s the secret for improving your changes of getting a loan? Let’s break this equation into two parts: why banks say no and getting to yes- a legal perspective.

I. Why Banks Say No

We must always remember that a bank is not a public utility. It exists to make money for its shareholders. This means that the bank’s role is not necessarily to lend money to every great idea that comes across its desk. The bank’s position is to ensure that it is profitable by lending money to ideal candidates.

So what does a bank look for? Jim Blair is a Regional Senior Sales Manager for Scotia Bank and he comments: “An ideal borrower for a bank is a company which is well-run and well-executed. The management team is focused and experienced and reinforces these qualities by hiring competent professionals.”

If we expanded Jim’s quote into key factors, we could divide the reason why banks say no into three categories:

1. Financial Issues:

* Too much debt already in the company

* Not enough money put into the business by the owner(s), which, in the bank’s eyes, shows a lack of commitment and collateral to secure the loan

* Insufficient cash flows to meet potential loan obligations

2. Legal/Regulatory Issues:

* Difficulties with regulatory organizations such as suspended licenses and unpaid taxes

* Frequent changes in professionals indicating potentially unusual or fraudulent activity taking place

* Lack of protection of key assets (see below)

3. General Business Issues:

* Poor industry conditions

* Inadequate business plan

* Lack of management experience

* Applicant cannot justify loan amount (i.e. too large a request relative to revenues or bank cannot determine how loan amounts will be used

It is best to anticipate these issues and attend to them before applying for a loan. It is also important to consider that banks have a wide variety of financing options available, ranging from traditional term loans to large over-draft protections. Thus, keep an open mind about the types of financing available to you.

Depending on what type of financing you apply for, you must also determine which of the above-listed factors to pay more attention to in your application. For example, you will need to be quite detailed in what types of assets you wish to purchase if you apply for a loan under the Canadian Small Business Financing Program (a program in which the Federal Government guarantees a certain percentage of a loan for eligible candidates).

It is also important to keep in mind the “soft skills” required to obtain a loan. Banks are run by people. A loan officer will view your application more favorable if he/she knows you. This is especially true if you are already their client. A Canadian Federation of Independent Business study shows that approximately 40% of identifiable decision-makers in your loan application will be in your local branch. Thus, it is advantageous to know branch employees well.

Develop a relationship with a bank by opening your personal and business accounts, credit cards and other banking services with them. Introduce yourself to your account manager and describe your business in detail. Maintain your relationship by having coffee or lunch with the account manager and picking their brains about business. When it comes time to apply for a loan, the bank will know you are a long-standing client with hopefully a stable banking history. Accordingly, the bank will try to do as much as possible for you to ensure you do not go to a competitor.

II. Getting to Yes - A Legal Perspective

Lawyers and bankers are, in many respects, in the same line of business. We both deal with risk management. Bankers deal with monetary risk. Lawyers deal in liability risk. But, at the end of the day, both types of risk management have the same end goal of protecting money. Thus, your ability to “get your legal house in order” appeals to a banker’s desire to minimize the risk of losing money and increases your chances of obtaining a loan.

Specifically, keeping your business legally well-maintained will minimize the chances of painful events, such as tax audits, regulatory trouble or lawsuits, which cause your cash to disappear quickly. Protecting your money by using the law properly may result in healthy cash flows and minimizing debt which are signs banks look for when assessing a loan application.

From a legal perspective, your chances of receiving a loan will increase if you and your lawyer take the following steps:

1. Organize your business properly

A bank will need to ensure the documents underlying your business are properly organized for many types of loans. If your documents are not ready, you will appear unprofessional and disorganized. This will not put the bank in a friendly position to assess your application.

For sole proprietors, a master business license, business name registration or, depending on the situation, trademark should be obtained. For partnerships, a declaration of partnership and a master business license should be filed and a partnership agreement drafted. If one of the partners has poor credit history, steps should be taken either to rectify improper entries on your credit report or wait until certain bad debts have expired from your report (a credit report may be obtained at www.equifax.ca for a fee).

For corporations, resolutions and by-laws should be drafted if you filed articles of incorporation. Without these documents, your corporation is not properly organized and you are committing fraud if you tell the bank you are the president and you have no paperwork to prove this claim. Your minute book should be updated if you already have resolutions and by-laws.

David Newton, a financing expert for www.entrepreneur.com, writes that failing to provide proper legal documents to prove your business’ existence may deny you a chance to raise capital.

2. Protect your assets

For some loans, banks require collateral as security in the event of non-payment. A bank needs to make sure you have taken the proper steps to protect your assets. Businesses that rely on intellectual property may need to register appropriate trademarks and obtain patents pending or secure patents. As a side-note, the traditional banks generally do not lend money to entrepreneurs to pay for trademark or patent protection unless the registrations are part of a much larger approved project. You may decrease your chances of obtaining a loan if a critical asset in your business (i.e. a machine for producing inventory) can be considered affixed to rented property or a leasehold improvement since the landlord may have priority to that asset in the event of non-payment. Speak to your lawyer about determining appropriate strategies to avoid these situations.

3. Conform to regulatory requirements

Many industries, such as food, transportation and travel, are either self-regulated or regulated by the government. Your chances of obtaining a loan are almost non-existent if you are in violation of the rules and regulations of your industry. For example, a bank will not advance a line of credit to a travel agency if its license to conduct business is suspended or revoked. After all, would you lend money to someone who is not allowed to run their business and cannot generate income? It is especially important to make sure all your taxes are paid before you apply for a loan. Generally, a business in debt must pay the government first. Thus, a bank will not loan you money to pay off the government since the loan is not being used to generate income. Before you apply for a loan make sure all your government and quasi-government filings (i.e. taxes, licenses, permits, dues payable) are in good standing.

4. Involve your lawyer in the process

For more sophisticated financing, some businesses have their lawyers and accountants review their business plan before applying. This is a “quality control” process to make sure that persons who do not have a direct interest in your business find your business plan appealing.

Following one or all of these steps will not guarantee that you will receive a loan. It will improve your chances. As always, please remember that business is fundamentally grounded in building relationships. Thus, a good first start to apply successfully for a loan is developing a relationship with your banker even if you do not need a loan now. It will lay the groundwork for a future application.

For further resources, please start with some readily available articles on the internet including the websites for the Canadian Federation of Independent Business (www.cfib.org), David Newton’s columns on www.entrepreneur.com and the National Federation of Independent Business (www.nfib.com). Some of my research is from these sites.

I wish you the best of luck.

This newsletter is designed to provide general information only, without regard to specific geographic area or circumstance. It does not in any way constitute legal advice nor in any way create any lawyer–client, contractual or other relationship. If you require legal advice, you are urged to contact a qualified licensed legal professional to assist you..