The Secrets of Bank Financing

For small and medium-sized enterprises, finding the right financing partner is important, just as vital as figuring out the right balance between debt and equity financing. Our staff at KSSP Partners LLP is there to help you uncover the best way to determine the balance sheet that works for your business.

Let’s get right into it. Below are a few of the oldest-kept secrets about bank financing:

Secret #1: Not every bank is right for you

Many CFOs do a lot of term sheet shopping and often go with the bank that offers the best financing terms. In practice, there is no “perfect term sheet” and often, going with the “best term sheet” may be a bad decision, because the bank may not be the best partner in the long run.

Yes, a bank should be supportive, reliable, and reputable, but most importantly, it should suit your needs in the short and long-term. Before going to a financier, it is important to understand your short-term and long-term strategy, working capital requirements, and optimal financing needs. Once you have your needs defined, understand which financing products suit your needs, and go with the bank that offers the most suitable products at a reasonable price.

Ideally, the bank you are seeking financing from should be your corporate bank for operational needs: the more product you use from a bank, the more benefits you are able to extract from your financing partner at a lower cost and the greater negotiation powers you hold down the road. As you expand, especially globally, you will need more complex products and often more flexible banking needs – and at that point, switching a bank is likely to be a costly exercise.

Secret #2: Not all financing products are made equal and they change (fast) as you grow

Your financing needs are not always easy to understand and often depend on what industry your business is in and what your end goals are. Below, we briefly describe the main commercial banking products beyond traditional loans and overdrafts:

1. Lease Financing: Most suitable for high-cost assets that generate revenue, which benefits the company by aligning the cost of acquiring the assets with revenue generation. Lease financing can create greater efficiency in cash flow and may simplify corporate taxes. This solution is often most suitable for transportation, manufacturing, and construction companies.
2. Trade Financing (best for working capital): If your business engages in any type of foreign trade, it is important to look into trade financing solutions, which can be customized to your needs depending on the bank. For example, letters of credit (import documentary credits), import finance, export finance, bank guarantees, export/import loans).
3. Receivables Finance: Banking products have evolved, especially with new technology at hand. Some banks may provide financing as soon as you send the invoice to your customer. Banks may finance up to 90 percent of the value of your invoices, freeing up your capital to pay other business expenses. Receivables finance reduces customer credit risk and provides faster access to working capital – if your business is inventory and/or receivables heavy – this is a must-have discussion for your CFO.
4. Project Finance: Financing made for long-term infrastructure and industrial projects; typically done by a specialized ground within the bank. The loan structure is highly reliant on the project’s cash flow for repayment, while the cash-flow generating assets, rights, and interests are held as collateral. This is often an attractive form of financing because companies can finance major projects off-balance sheet; often structured as a limited liability.
5. Sustainable Finance: This is a relatively new area of finance. In short, this type of financing does not just take into account the traditional financing metrics (leverage, assets, profitability etc.), but also the environmental, social, and governance issues that the financing can help solve (be it for a project, an internal enhancement or sales). Each bank has a different criterion for financing “green” projects, but in general, if your firm is looking to finance certain initiatives to transition to an environmentally friendly operation or is looking to sell environmentally conscious products, sustainable finance should be on your list.

Secret #3: Government-backed financing is not always best

A government-backed loan is a loan subsidized by the government, oftentimes designed to protect the lender against defaults from risky borrowers (to an extent), such as start-ups, new projects, R&D, high-growth firms etc. There are a variety of business financing programs available from the various financial institutions in collaboration with the federal and provincial governments. For example, the Canada Small Business Financing Program, the BDC Small Business Loan, or the Southern Ontario Fund for Investment in Innovation. All are very popular and available from the major banks.

The advantages of such programs are clear, but the disadvantages are in the details: there is usually a 2% registration fee, the interest rate can range between 6 and 9 percent, while the application criteria are often fairly restrictive, without any flexibility of what you can spend the money on. The government loans are often designed to encourage specific activities, such as hiring employees, training staff, or going green; the spending of such capital is often restrictive. Moreover, you may be required to take out the loan entirely and pay interest on the full amount, even if you are not using all of the funds immediately. Note that the bank will often require you to personally guarantee the funds, leaving you personally liable.

Contact KSSP Partners LLP for Tailored Advice on Financing for Your Business

Not all financing is made equal! Our financial professionals can help you understand what financing is most suitable for your business at every stage and which banks or financial partners are best suited for your needs.

At KSSP Partners LLP, our business consulting services can help you perform strategic planning and find the right financing partners for you – we have a lot of experience in finding the right financing solutions, given our long-standing business relationships with numerous organizations. Contact us online or by telephone at 289-554-5997.