6 tips for borrowing money in tough economic times | BDC.ca
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6 tips for borrowing money in tough economic times


Met with your banker lately? Now would be a good time, whether your company is in the market for a business loan or not.

Your banker can be your best friend when economic times are tough. But, as in any relationship, credibility and trust are key. And that requires mutual respect, honesty and staying in touch.

Contact your banker often and keep them posted on what's happening with your company, even if you're not looking for money. Bring them into your inner circle and have them visit your operations at least once a year. Ideally, develop that relationship during good times so that you can count on the bank when times get tough.

Bankers are much more receptive to loan requests from companies they have established relationships with. But expect more stringent due diligence and more questions from lenders when the economy isn’t doing well.

Your business loan to-do-list

Borrowing money can make good business sense for well-managed companies that plan ahead. Here are a few things to consider in preparing for that critical meeting with your banker:

1. Decide what type of money you need

Is it equity, working capital or long-term money for fixed assets? Knowing what type of money you need will determine whether you approach a bank, credit union, equity investor or other financier.

2. Two lenders are better than one

Part of your planning for the worst should be to shop around and establish additional sources of credit. If you are large enough, divide your financing between different institutions. If you are smaller, split your financing needs into shorter—and longer-term.

3. Satisfy the five "Cs" of lending

Entrepreneurs should understand what criteria a lender will be applying in its assessment. These can be referred to as the "five Cs of credit."

  • Character: Does your management have the skills, experience and track record to deliver?
  • Capacity: Do you have the ability to repay the loan? Banks will be looking at both your track record and your anticipated cash flow.
  • Capital: Is your equity base strong?
  • Conditions: How are local, national and even international events affecting your business?
  • Collateral: Often mistaken as the most important thing a banker wants, collateral is actually lower on a banker's priority list, compared to the other "Cs."

4. Talk to your banker

As discussed earlier, don't be a stranger: keep the lines of communication open. This includes meeting all of your company's reporting requirements on a timely basis.

Sending your financial statements and other reports late to your banker leaves a very bad impression.

Likewise, do not exceed your approved credit limit. If your company is going to need additional money, talk to your banker in advance to inquire about getting a temporary extension.

And lastly, be realistic about your short- and long-term cash flow projections and share this information with your banker. This can be used as the basis for your line of credit once it's required.

5. Do your homework

When a banker asks for more data and more paperwork, don't put up a fuss. Banks are in the business of lending money, but their head offices do more thorough due diligence in tough times to ensure the money they loan is for sound business ventures.

It can also be important to firm up your business plan. Bankers often have to improve clients' business cases and plans before they can lend them money. Entrepreneurs who do their homework and produce a solid business plan are more likely to get funding.

6. Run a tight ship

This is back to basics stuff that not all companies stay on top of: Focusing on activities like collecting accounts receivables promptly, paying bills and tracking inventory. Banks will want assurances that you are taking care of such business fundamentals.

In a nutshell:

  • Prepare well and in advance.
  • Diversify your risk.
  • Ensure you understand what criteria will be used to assess your business.
  • Be forthcoming—answer a banker's questions 10 times if need be and disclose problems early.
  • Master your business plan.
  • And maintain a good handle on your basic finances.