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Money is not a commodity. By definition, a commodity is a generic product that is bought and sold on price alone. Canadian bills for example, look the same, smell somewhat the same, and are available country wide. But, when you want to borrow money, rent the money in fact, the price for that money is not at all consistent.
Why does the price of money change? This happens because your lender or investor does a risk assessment of you and your circumstances that affects what they will be charging. Let’s look at this from the point of view of a business loan. Here are nine things not to do when asking for a business loan.
1. Does the bank understand your business? I have seen deals collapse because the lender could not figure out how the company stayed in business and why anyone bought their widgets. In the 1970s there was a chain of sandwich shops in London, Ontario all loudly decorated with RED stop sign wallpaper. They were always empty and we used to speculate that they fronted for criminal activity. Do your homework on a unique selling proposition that explains in 50 words or less, how you make money.
2. I have seen transactions collapse because the ownership structure is just too complicated, prompting the lender to throw his hands up in despair. KISS. Keep it Simple, Stupid.
3. Is this a start-up? Most start-ups fail instantly and sometimes haunt the lender for years before finally collapsing. Angel investors have told me that 13 of 14 deals in which they invest end badly. So the 14th has to make up for all the failures.
4. Credit history. Increasingly, we are depending upon the snapshot of the credit report to tell us whether you manage money well or not. No lender wants to fund a business where the money is managed from the cash till, or places his “lifestyle” ahead of his obligations.
5. Assets to lien? Since the 1950’s banks have been encouraged to help people buy their own homes, thereby creating a careful lender game of deciding if the loan can be backed by recoverable assets. The poorer the asset quality, the higher the rate will be. Think of business assets as the poor relation to that home on the lake that the banker can seize.
6. Skin in the game? Forget borrowing if you do NOT have your own money in the game. Until recently, that has been the only truth. But Canada has some great rules to govern crowdfunding and protect the unwary investor. Seedups is the Canadian version of an Irish company which helps start-ups get the initial tranche of cash they need.
7. Strength of the management? The owner of the company typically makes the pitch to the bank or the lender to get more money. A long history of uneven results , while everyone else is doing well, points to rotten management. Doing poorly in a herd of low performers shows a management with no imagination.
8. Strength of the balance sheet. Businesses can sell like crazy and still go out of business. In the 1990s my neighbour was a manufacturer and importer of children’s clothing, opening stores almost every month. Sales skyrocketed, profits were phenomenal but the stores failed. The lender will first look at your balance sheet and NOT the profit and loss statement. If your debt is high or you are experiencing a cash crunch due to high growth, be prepared for some tough questions about injecting more of your cash.
9. Finally, going too late to the lender, bank or investor is bad. Arriving cap in hand because the business is now struggling shows poor judgment and controls. You can expect to pay more for your money and it will come with hooks.
This column focuses on business problems and how to solve them. Andrew Gregson, BA, MA , M.Sc.Econ is a mortgage broker, economist, and author.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.