Business financing: Playing your cards right

When comes the time to secure financing from a bank for the launch or development of an SME, nothing can be taken for granted. While it’s understood that each case is unique and that the business sector, the target market and numerous other factors are taken into consideration, it’s clear that precise criteria need to be respected.

To help you better understand the evaluation process and to maximize your chances of success, we hereby provide you with advice and information on the mechanisms surrounding the application for business financing.

Criteria taken into consideration

Upon reception of a financing request, whether it involves a business launch or expansion, all submissions are carefully analyzed according to a clearly-established set of criteria:

• Your financial contribution and that of your business partners or associates
• Contribution of outside investors
• Strengths and weaknesses of the business
• Risk factors associated with the start-up or growth of the business
• Profitability and financial spin-offs of the project
• Financial latitude and the ability to support the enterprise
• Completion of a serious business plan containing credible data
• Knowledge of your business sector
• Shareholders with strong management skills
• Sales and development
• Technical knowledge and expertise
• Capacity to absorb the expenses related to your project (e.g. start-up costs, professional fees, business plan expenses, market research costs, banking fees, etc.)

All serious requests for financing are studied attentively. In certain cases, the analyst responsible for your file may suggest certain additions or modifications before providing a re-evaluation of your request.

It goes without saying that financial considerations exert a major influence on the final decision and that, if doubts persist, a personal guaranty as well as a security bond may be required. Where applicable, your bank representative will explain in detail the reasons behind his/her decision and the stakes that apply.

In spite of everything, certain factors may motivate the dismissal of a request. Here are a few, among others:

• Insufficient capital investment or collateral of involved parties
• Unrealistic financial projections or dubious chance of success
• Potential conflict with adherence to environmental laws and regulations

Your business plan: make it your priority

In your opinion, what’s the best way to open doors to your financial institution? Experts in commercial finance will quickly provide the answer: a thorough business plan based on carefully prepared forecasts. Whether you’re launching a new business or getting ready to expand, it’s the key.

A business plan constitutes a complete and detailed profile of your enterprise. It should contain all the information necessary in order for your banker to analyze your file and render a fair and informed decision. Your business plan should address the following points:

• Historical background of the existing company
• Credible forecasts of sales and expenses
• Evaluation of you financial needs
• Facts and data originating from market research
• Marketing strategy
• List of business partners and/or shareholders
• List of management personnel and their particular skills
• Description of facilities and equipment
• List of your major suppliers
• Financial statements of your business over the last three years
• Details concerning investment capital, equity and collateral
• Information concerning research and development

To find out how to prepare your business plan, consult our brochure Business Plan: Don’t lose your way on the road to success, available at your branch.

Glossary of Financial Terms

Financial jargon is not gobbledygook! This mini-glossary will give you an idea of what it’s all about.

Debt-to-asset ratio
It measures your company’s debt relative to the capital invested in it. A high debt level can be worrisome. To support your business, you can raise funds through borrowing (debt financing) or by selling a part of the company (equity financing). To calculate the debt-to-asset ratio, divide total liabilities by owners’ equity.

Interest coverage ratio
It’s ratio of a company’s net income (before extraordinary items and income taxes), readjusted by adding back amounts you subtracted to calculate net income (e.g. interest and taxes) and divided by interest payable.

Quick ratio
This ratio determines a company’s ability to raise cash through the sale of its most liquid assets in order to meet its liabilities. The quick ratio is calculated by subtracting inventory from current assets, then dividing this figure by current liabilities.

Current ratio
This ratio measures your company’s ability to honour its debts. To calculate your current ratio, simply divide current assets by current liabilities. The higher the ratio, the better the financial health of your company.

Return on investment (ROI)
ROI is generally used to determine a company’s profitability. Investors can compare this figure to other types of investment. To calculate ROI, divide net income by total assets.

Accounts receivable turnover
This ratio reveals how fast your accounts receivable are being paid, and is an important indicator of cash reserves for your company. It shows how many times a year you collect on your receivables. Calculate this ratio by dividing the value of your receivables by your total sales, then multiplying the result by 365.

Inventory turnover
This ratio indicates if your inventory is selling well and if it is a major source of cash for your business. It reveals how often you sell your inventory in one year. To calculate inventory turnover, divide your inventory’s value by total sales, then multiply this figure by 365.

Break-even point
It represents the sales threshold where operating revenue equals operating expenses. The break-even point can also be expressed in units of a product.