Debt Capital for Business in Canada> Business > Articles
Obtaining Debt Capital for Your Business
DISCLAIMER The information provided here is of a general nature and may not apply to any specific or particular situation. It is not to be considered as a legal advice nor presumed to be indefinitely up to date.
Because most loans and lines of credit are asset based loans, knowing the lender’s guidelines is very important. The industry and market characteristics, the stage and health of the startup in terms of cash flow, debt coverage, and collateral are critical to the lender’s evaluation process. Naturally, startups have more difficulty borrowing money from banks than established businesses because they don’t have assets, track record of profitability and a positive cash flow. Banks that advance loans to startups usually do so for previously successful entrepreneurs of means or for firms backed by investors with whom banks have had prior relationships and whose judgment they trust. Although, startups managed by entrepreneurs with a track record and with significant equity in the business who can present a sound business plan can borrow more successfully, still with little equity or collateral to pledge, the startup won’t have much success with banks.
How good of a borrowing deal an entrepreneur can strike is also a function of relative bargaining position and the competitiveness among the alternatives. If the startup already has significant debt and has pledged its assets, there may be no room for negotiations. A bank with full collateral in hand for a company having cash flow problems is unlikely to give up such a position to enable the company to attract another lender, even though the collateral is more than enough to meet this guidelines. Further, the availability of bank financing for high tech startups also depends on where a business is located. Debt and leases as well as equity capital can be more available to startup companies located in clusters of entrepreneurial and technological activity such as Ottawa, Toronto, London, Kitchener and Waterloo than for those that are located in the northern Ontario. In centers of high technology and venture capital the main officers of the major banks will have one or more high tech lending officers who specialize in making loans to early stage, high technology ventures. Through much experience, these bankers have come to understand the market and operating idiosyncrasies, problems, and opportunities of such ventures. They generally have close ties to venture capital firms and will refer entrepreneurs to such firms for possible equity financing. The venture capital firms in turn, will refer their portfolio ventures to the bankers for debt financing.
2. Loan Process
The process of obtaining a loan generally consists of the following stapes:
(1) The entrepreneur determines how much money is required, when it is required, and when it can be paid back.
(2) The entrepreneur identifies potential sources for the type of debt he is seeking, the amount, rate and terms and conditions of a loan.
(3) The entrepreneur selects a bank or other lending institution and prepares a written loan request. (4) The bank evaluates the entrepreneur's loan request. (5) The bank documents the loan. (6) The entrepreneur receives the loan proceeds.
(4) The bank evaluates the entrepreneur's loan request.
(5) The bank documents the loan.
(6) The entrepreneur receives the loan proceeds.
3. Before the Application
Once a startup is formed, the entrepreneur should look for a banker and bank with which he or she can establish a relationship. Choosing a bank and more specifically, a banker is one of the most important decisions an entrepreneur will make. A good lender relationship can sometimes mean the difference between the life and death of a business during difficult times. The choice of a bank and the development of a banking relationship should begin when the entrepreneur does not urgently need the money. When the entrepreneur faces a near term financial crisis, the venture’s financial statements are at their worst and the banker has a good cause to wonder about entrepreneur’s financial and planning skills ?all to the detriment of the entrepreneur’s chance of getting a loan. Because of the importance of a banking relationship, the entrepreneur should shop around before making a choice.