Picking the right banker to deal with can make all the difference when it comes to get financing for your business. You might think that picking the right bank is the most important thing, and while it’s important, picking the right individual to deal with is equally important.

The first thing I would look for in a banker is experience. Unfortunately, age does not equal experience. When banks have difficulty filling a commercial account manager position, they have been known to persuade one of their personal lending staff to take the job. These personal lenders are usually very good at their jobs and they know their way around the bank, but it takes experience with business lending to be really good at the job. Personal lending is based a lot on credit scores and well defined rules, which makes lending decisions straightforward. Businesses vary widely between industries and because of this, a simple decision model for lending isn’t possible. Commercial lenders have a lot more responsibility for coming up with a decision on their own.

Commercial account managers don’t have very much lending authority at the branch level so most larger loan requests will go to a regional risk management centre for approval. Having the respect of the credit managers will get a commercial account manager the benefit of the doubt when a decision is close. It takes some experience to gain this respect.

Take a look at the branch where you are considering doing business. If everyone is under 30, it implies that the bank has trouble hanging on to staff in that location and you may not get the most capable service. It’s like a hockey team; you need a few veterans around to make sure the job gets done when things get tough.

Business knowledge is a very important attribute for a commercial account manager. This can be gained on the job but real world experience in business can be a great help in many instances. This is particularity true in specialized lending like real estate or agriculture. Don’t be too worried if your banker does not have direct knowledge of your particular business. For example, if you are a manufacturer, your banker might not have direct knowledge of your product but he or she might have knowledge in other manufacturing that he or she can apply to your situation. Remember, your banker doesn’t have to run your business, he or she only has to know how to lend to it.

It’s important to have good communication with your banker. Invite him or her to your place of business for a tour. It’s a lot easier to lend when he or she has seen what you do firsthand. It’s even more important to keep in contact with your account manager when things are going badly. Everyone wants to see you succeed. If your business fails and you can’t repay your loans, everyone loses. Your banker won’t give you consulting advice, but if they feel your business is viable in the long term, they will adjust financing and payments to help get you through a difficult time.

Take time to pick your bank and your banker. There is a cost to switching banks and a long term relationship can be worth a lot.

This post discusses an assortment of banking services that fall into a category loosely labeled “Cash Management”. These services are lessor known banking services that make it easier to make and receive payments.

Merchant terminals that take debit and credit cards are a must for many businesses. These terminals must be qualified for, much like a loan. The potential for fraud with a merchant terminal is very high so banks are very careful about who gets them. There are monthly fees of approximately $35 and transaction fees of $0.15 per debit transaction and 5% of each credit card transaction. These fees vary widely depending on transaction volumes and the type of equipment needed. Membership in certain trade organizations can lower the fees as some of these organizations negotiate group discounts.

Two types of credit cards are available for your business. The first type is very similar to a personal card but it is in the company’s name. You have to guarantee this card personally and it will show up on your personal credit report. Interest rates and annual fees are comparable to a premium personal card but loyalty programs such as Airmiles use a lower conversion rate. The approval process goes through the credit card company and your local bank doesn’t have much input.

A purchasing card is available for larger companies. A global limit for all cards is approved by the bank, much like a loan facility. The business can decide which employees get which limits. This card type allows an employee to hold a card without being personally liable for paying off the balance. This facility will have an application and annual fee. The interest rate might be slightly lower than the other card type but the balance must be paid off each month.

Many banks offer payroll services through a subsidiary. These services take care calculating deductions and submitting them to the government. The will pay your employees via electronic funds transfer (EFT). There is generally a flat fee for each payroll and a fee for every individual employee. This service can be valuable in that it cuts down on the administration of doing payroll and writing cheques. Operating account transactions are reduced because the service will use one transaction to take the funds for payroll which saves the transactions related to writing cheques to 10 employees, for example. It is also a benefit for employees as they don’t have to take time to deposit a cheque and they don’t have to worry about holds as all funds are deposited clear into the employee’s account.

Most financial institutions offer some sort of business banking website. The features on these websites vary widely but they are free. Many banks charge a premium for access to more advanced website features. It is possible to use these sites to submit payroll deductions and pay employees directly. This is a less convenient method than using a payroll service but it may be more economical.

These cash management services can vary widely in features and cost between the banks. It’s important to weigh these considerations against the convenience of having all of your services where your business accounts are located.

Equipment loans are used for financing a wide variety of equipment such as agricultural equipment, construction equipment, and even equipment working in a factory. This post will discuss equipment loans that fall outside of the Canadian Agricultural Loans Act (CALA) program or the Canada Small Business Financing Act (CSBFA).

Equipment loans have regular instalment payments matched to the business’s cash flow cycle. The repayment period (amortization) on the loan is matched to the economic life of the equipment being financed. These loans will take the equipment being financed as collateral. The bank will not lend the full amount of the purchase but rather 50% to 75% of the purchase price. The lending value is determined by the age and marketability of the equipment. The discounted lending value is meant to protect the bank against the inevitable depreciation of the equipment. The bank wants to make sure that the collateral is always worth more than the value of the loan.

These loans come with fixed or floating rates. Floating rates are based off of the prime lending rate with spreads of 1% or more, depending on the creditworthiness of your business. Fixed rates for equipment are generally higher than mortgage rates. Prepayment of a fixed rate equipment loan may not be allowed or may cause stiff prepayment penalties but this varies from bank to bank.

Dealer financing for equipment can generally be done at 100% of the purchase price. They do this because it is much easier for them to repossess equipment and sell it than it is for the bank, which does not operate a dealer network. Dealer rates may appear to be lower but watch for documentation fees or setup fees that can create an effective rate of interest that is close to that of your financial institution. A dealer may not give the same amount of a discount off of the purchase price for a deal they finance in house compared to a cash purchase. This also adds to the cost of borrowing.

Financing equipment can get complicated so I recommend that you shop around for your financing. Make sure you compare the total cost of borrowing of the various options that are available. Leasing equipment is another possibility. I’ll cover that in a future post.

Commercial mortgages are broken down into two categories:

1. Owner occupied
2. Investment property

The lending guidelines are going to be quite different for each type of mortgage but there are some similarities. An appraisal will be required in each case to establish the value of the property. Plan on spending a minimum of $2,000 for a commercial appraisal. It is also possible that an engineer’s report will be required, particularly if there are any concerns about the soundness of the structure of the building. An environmental assessment will have to be conducted by the bank. If this assessment finds any areas of concern, a full Phase 1 environmental report will be required. Phase 2 and Phase 3 reports could be required, depending the results of the preceding reports. The bank takes environmental liability very seriously (you should as well) because the cost to clean up a contaminated site could be devastating.

Unlike a residential mortgage, you’ll have to pay the cost of the above reports along with the legal fees for registering a mortgage. As a result, closing costs can be quite significant and they need to be planned for.

An owner occupied mortgage has a lower approval standard that must be met. Cash flow from the business must be sufficient to make the mortgage payment each month. The bank will look at your financial statements for the past few years to determine how stable you cash flow is. This gives them a degree of certainty that the mortgage will be paid. Lending value for a mortgage of this type will be in the 50% to 75% range. This means that the down payment will need to be in the range of 25% to 50%. This will depend on the marketability of the property. For example, a single use property in a rural area may be given a lending value of less than 50%. This is because if the bank foreclosed on the property, it would be very difficult to sell for a good price. The maximum amortization for this type of mortgage is usually 25 years.

Investment property mortgages have a higher standard of approval. The property must pass a cash flow test that shows that the rents from the building can cover the mortgage payments plus costs associated with maintaining the building. The bank will want to see historical rent rolls so that an average rent and a vacancy rate can be established for the cash flow test. With these types of mortgages, the amortization will have to be 75% or less of the remaining economic life of the property as determined by the appraiser. This can often result shortened amortization times. Lending values and down payments are generally the same as for owner occupied property. It is possible to get CMHC insurance on some types of properties such as apartment buildings, but the cost of the premium usually makes the insurance too costly.

It’s best to talk to your bank or credit union before shopping for commercial property. Lending guidelines can vary widely between institutions. It’s important to make sure that your Commercial Account Manager has expertise in these types of deals. They can be complex and therefore difficult to get approved. You’ll want an experienced person working with you.

The Canadian Small Business Loans Financing Act (CSBFA) is a Federal Government program that is meant to make it easier for small businesses to access the money they need to grow. This program provides a level of insurance against default by the borrower, which protects the lender. The insurance is provided by the Federal Government and is administered by the banks. CSBFA insured loans are available to businesses that have less than $5 million in gross annual revenues. A business can have a maximum $500,000 of these loans outstanding at any given time, with a maximum of $350,000 tied up in equipment or leasehold improvements.

Examples of eligible items include:

• buildings and land
• commercial vehicles
• hotel or restaurant equipment
• computer or telecommunications equipment and software
• production equipment

Ineligible items include:

• goodwill
• working capital
• inventories
• franchise fees
• research and development

The advantage of this program over normal financing is that 90% of the purchase price of eligible items can be financed. A bank would finance a much lower percentage of the purchase price if the loan wasn’t insured. There is a cost for this increased level of financing however, as the government requires 2% of the loan amount as an insurance premium. This can be financed as part of the loan. Interest rates are higher compared with other loans with floating rates at prime plus 3.0% and fixed rates at the bank’s residential mortgage rate plus 3%. A portion of this interest is paid to the federal government as part of the insurance premium.

Collateral for the loans is the assets being financed. If you are borrowing through a company, the bank can request a personal guarantee in amount up to but not exceeding 25% of the loan amount.

Detailed receipts must be provided for all items and services being purchased as the bank must prove that only eligible costs were financed. This can be quite a hassle, especially in the case of leasehold improvements which can create a lot of receipts for materials and labour.

CSBFA loans can be a good source of funds for the first time entrepreneur because the higher financing percentage means that less start up capital is required. It’s important to shop around for a CSBFA loan. Some banks don’t have a desire to do these loans due to the increased administration required. Make sure that you find a bank or credit union that is enthusiastic about the program and does a reasonable volume of CBFA loans. It takes some expertise to approve and set up these loans so it is best to deal with an Account Manager that has a lot of experience with them.

This post about overdrafts & operating lines is part of our banking series.

A standard operating account has no overdraft protection; meaning that if you write a cheque for more than your available account balance (total balance minus funds held) it will be bounced due to non-sufficient funds (NSF). Some institutions give their Commercial Account Managers small amounts of discretion to allow these cheques to go through but financial institutions have been reducing this discretionary authority over the years. Unless you have a borrowing relationship with your financial institution, it is unlikely that you have been assigned to a Commercial Account Manager.

It’s always a bad idea to put your account in an NSF situation. Your cheque will likely bounce but even if a Commercial Account Manager decides to pay your cheque you’ve likely just weakened your relationship with the bank. Bank employees put their career at risk when they decide to pay these cheques and they grow frustrated with people who cannot balance their cheque book. Even if your NSF cheque is covered by the bank, you’ll being paying 21% interest on the amount your account is overdrawn.

Overdraft protection products come in two flavours at most banks.

1. Overdrafts
2. Operating Lines

The process of applying for an overdraft is pretty straight-forward. The form will be simple and they won’t require detailed information but it’s best to take along your financial statement and a personal financial statement so you have the information at hand. The decision will be based largely on your personal credit score. This means that if your business is incorporated you’ll be providing a personal guarantee. They will also take a general security agreement (GSA) over the assets of your business. The interest rate on this will be high and there may or may not be a monthly administration fee or application fee. Most banks limit this product at about $10,000.

An operating line application is a more complex process. You’ll want to take in your last three years of financial statements, a personal financial statement and your last three personal tax returns. The personal documents are required for each shareholder.

Most banks have have a two tiered application process. For amounts under $250,000 or so, the application process will be a small set of forms and will likely be decided upon by a computer algorithm that takes into account a number of financial criteria and your personal credit score. Sounds simple right? Not so fast. If your business doesn’t fit neatly into one of the boxes, you’ll be declined. If this happens, I recommend applying at a credit union because they may take the time to evaluate your situation and make a personal decision.

Security will be the same as an overdraft but pricing might be lower due to the larger amount borrowed. If you offer up cash or real estate as security, your rate will be substantially reduced. There will likely be a monthly fee and an application fee.

For amounts in excess of $250,000 a more detailed process is used. You’ll have to provide aged lists of accounts receivable and payable in addition to the documents needed for lower amounts. A commercial account manager will take the time to get to know your business because it is likely that the decision process will be made by the commercial account manager and the bank’s risk management department. This decision process will take longer but the good news is that you stand a better chance of being approved if your business is a bit unusual.

Security will be the same as a smaller operating line but the bank may take your accounts receivable and inventory as security. Banks generally use 50% of inventory and 75% of account receivable in its calculation of lending value. Inventory that is perceived as unsalable and accounts that have receivables that are more than 90 days old will be removed from the lending value calculation. The lending value must be greater than or equal to the operating loan limit or the limit will be reduced to match the lending value. The limit will be tested monthly for most businesses but those with a longer operating cycle may be tested quarterly or annually.

To perform this lending value calculation, the financial institution will ask for a monthly listing of inventory and an aged list of accounts receivable and payable. It is important to provide this information on time as your account will be considered out of order and the operating line could potentially be frozen until the information is received. The bank will charge a fee for this monthly calculation (called margining) ranging from $25 to hundreds of dollars, depending on the size of the operating loan limit. There will also be an application fee in the range of 0.25% of the limit applied for.

An operating line is a solution for many businesses who have insufficient working capital to handle a long cash conversion cycle. It’s important to remember that operating accounts are not band-aids. Too often business owners apply for operating lines when the issue is really someplace else. Make sure an operating line is really what you need.

If you have any questions about this topic, please comment below or use the questions box.

This post is the second in the banking series.

A financial institution’s policy of holding funds is often a source of customer complaints because the rules and reasons are often poorly understood.

New accounts of all kinds are usually subject to the institution’s hold funds policy unless you are a well established client. The bank will prevent access to most Canadian cheque deposits for at least 3 days and up to as much as 7 days. A teller obviously won’t put a hold on a cash deposit but he or she will put a hold on a deposit containing cheques. This means that if you deposit cheques with a teller or anything with an automated banking machine (ABM), you will not have access to the funds for a least 3 days. Cash deposited through an ABM will be held because the machine has no way of verifying that the envelope actually contains anything.

The bank does this to protect itself against fraud by new account holders. This allows cheques that have been deposited time to clear through the payment system. Any forged or fraudulent cheques that were deposited will usually charge back to the depositor’s account during the hold period and bank staff will be alerted to the activity.

Cheques drawn on foreign banks will have very long hold periods (U.S. cheques are held for about 30 days) because the payment clearing system between countries is often very slow. Foreign currency cheques drawn on Canadian banks will have longer hold periods as well, from 10 to 20 days.

Clients who have established a relationship with their financial institution may have their hold limits increased. For example, a long time client may have the first $5,000 of a deposit available to him but any deposit in excess of this amount will be held. This gives the client instant access to his funds but limits a potential fraud to $5,000.

Bouncing too many cheques or other suspicions activity will result in the bank putting a “hold all funds” back in place. This is one good reason among many to keep track of your account balance to make sure you have the funds available before writing a cheque.

Bank products and policies are generally poorly understood. Bank employees have a heavy workload and they often don’t take the time to fully explain things. Business people are afraid to ask questions because it will reveal what they don’t know. This leads to frustration for everyone. This series on banking will help to alleviate this frustration.

Business accounts basically come in three flavours; operating accounts, savings accounts and U.S. dollar accounts. There are many variations of these three types as banks and credit unions add features to try to gain competitive advantage but ultimately beneath the window dressing, it’s just these three basic accounts.

Operating accounts are for the day to day activities of the businesses. Business owners can write cheques on these accounts or use a debit card to make purchases, much like a personal bank account. Business accounts are quite different though when it comes to fees charged to the account holder.

These accounts will have often have a flat month fee plus fees for each transaction. Business accounts are charged for deposits based on the content of the deposit. For example, one bank is charging $1.80 for every $1,000 in paper cash deposited and $1.80 for every $100 in coins deposited. There is also an approximately $0.16 fee for each cheque contained in a deposit. Cheques & deposit books are more expensive than those for personal accounts. Night deposit will cost extra as will the disposable plastic bags for the drop. Some institutions may offer a bundled price monthly price for a certain level of transactions.

Business savings accounts generally don’t have chequing privileges but most institutions allow a couple of free transfers to an operating account each month. The rate of interest paid on these accounts is usually tiered so that larger balances earn more interest. For example, it might take a $100,000 balance to earn 1%. As a rule, these accounts aren’t worthwhile and surplus cash should be used to buy short term investments instead.

Foreign currency accounts are available from most institutions. The most common is the U.S. dollar account because of the large number of Canadian companies that export down south. These accounts work much like operating accounts but the fee structure might be slightly higher. Financial institutions will take a commission whenever one currency is changed to another. This means that the exchange rate you see on the news won’t be the rate you will be getting at the bank. The commission varies according to the amount of money being exchanged. A transfer between an U.S. dollar account and an normal operating account will trigger these commissions.

The next post in this series will deal with the rules governing these accounts.