Canadian Commercial Business Bank Financing - What’s Right (and Wrong) With Your Banking Strategy

Canadian business owners and financial managers assess their commercial business banking and financing needs at different times in their company's life.

As in many other facets of business, it's a little difficult to develop a solution and fix a problem if you don't understand the fundamental problem.

The need to grow your business and be profitable usually drives a bank financing need. A growing business consumes and needs more cash, if only for the fact that you're building up receivables and inventories.

In Canada, business operating lines of credit are offered by our chartered banks. These facilities finance your A/R and inventory via specific margin calculations.

Most Canadian firms that have this type of credit facility submit monthly financials and aged receivables, which in turn create a new borrowing base under which you can draw funds. Companies that are having challenges (i.e., they are in special loans) or who are in breach of covenants may in fact be required to submit almost daily cash flow and receivable reports .

Although the basic arithmetic around bank financing and commercial banking is simple, in reality there are a lot of other factors that might end up affecting your bank facility.

What are some of these? In the continuum of time, certain industries fall in and out of favor. No better example of this is offered up than the auto industry. Other factors that you as a business owner might not like that affect your bank financing are issues such as your profits (or lack thereof!), the quality of business and outside collateral and your bank's insistence on personal guarantees.

Bank financing works best under the following condition - your company is expanding but at a reasonable rate. One of the greatest ironies of Canadian business financing is that a hyper growth business, even if its generating profits, is often viewed as financing challenged by a Chartered bank.

Business banking uses a very basic concept that is often misunderstood by the Canadian business owner. That's simply the fact that with a commercial bank line of credit, you're drawing on assets of your growing business to pay older items. But wow, when your business ceases to grow or profit, your ability to draw cash flow out of your A/R and inventory business line of credit stops. But you still have operating and fixed-term payment obligations, and it now becomes difficult to pay suppliers.

Companies that have a solid handle on cash flow needs and their historical working capital inflows and outflows are in the best position to manage their firms and access bank financing.

Time and time again, we meet with clients that tell a very similar story - business grew, expansion plans were put in place, fixed and operating costs grew, and .. you guessed it .. sales started flattening or going down. The result - a recipe for financial disaster!

The ability to manage your cash flow or, alternatively, slow down your business is key.