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Debt lenders
(creditors) make loans to businesses that exhibit strong management
ability and steady growth potential. A written business plan, including a
cash flow demonstrating the business' ability to repay the loan principal
and interest over the term of the repayment schedule, is mandatory. The
lender will expect you to have appropriate insurance to protect the
assets.
Characteristics: Principal repaid over a period of
time directly related to the useful life of the asset(s) (e.g. land and
buildings - up to 30 years, computers - 3 years).
A loan carries both
interest and principal repayment provisions in a set repayment schedule.
Early repayment may entail a penalty because the lender had not planned an
alternate investment for that money.
The percentage
interest rate normally remains constant for the term of the loan. Each
payment of principal reduces the balance of principal remaining and the
subsequent interest is calculated on this reducing balance.
Different lenders make
different types of term loans. Term loans often carry lower interest rates
than operating loans because the term is fixed and the loans are secured
by assets (asset-backed).
Types of Loan
Security Agreements
Promissory
Note: A promissory note is a written promise to pay a specified
sum of money to the lender either on demand or on a specified date.
Realty
Mortgage: The realty mortgage is a loan (mortgage) whose proceeds
are applied to the purchase or re-finance of land and buildings. A charge
against the title is registered with the Province.
Chattel
Mortgage: The chattel mortgage is a mortgage on specific assets
other than land and buildings. A lien charge against the title is
registered with the Province.
Pledge: The pledge is an agreement similar to the
chattel mortgage, except in that possession is transferred to the lender
but title remains with the borrower, e.g., your stocks and bonds held by
the bank.
Floating
Charge: The floating charge is an agreement which designates that
all the remaining assets in the business, not already mortgaged as
security for other debts, will be taken as the security for the new debt.
The title remains with you but a debenture is registered with the
Province.
Personal
Guarantee: This agreement says you will agree that if the limited
company is unable to repay the loan, you will do so personally. If this is
in addition to other securities, you would be wise to try to negotiate a
limited guarantee to cover the shortfall in the security for the loan. Try
also to recover your personal guarantee as soon as the business has paid
off its obligation or can carry the debt on its own security. That
personal guarantee places those things you and your family hold dear at
risk for the debts of the business.
Postponement
of a Claim:The Postponement of a Claim allows the lender to ask
for assurance that the company will not repay the shareholders until the
secured lenders have been repaid in full.
Approaching Long
Term Debt Lenders
The predictability of
repayment and degree of control over loan security makes the asset-based
long term loan the preferred investment of most lenders and lending
institutions. Provided that the equity requirement, leverage factors and
asset-based security is adequate, a variety of lenders can be found to
conclude these loan agreements.
These long term debt
financing sources can be divided again into the sub-categories of:
- Mortgage
Lenders
- Term Loan Lenders
- Equipment
Finance/Leasing Lenders.
Most people approach
the subject of borrowing money with some trepidation. You should never
view borrowing money from a commercial loan institution as begging for
money. Rather, consider that you are offering the financial institution an
opportunity to do business with you -to make a sale.
You will be renting
money from people who, in turn, are soliciting your business. Banks,
credit unions, finance companies and others need your business to make
their money work for them. Loans are just another commodity on a
retailer's shelves, and it becomes your challenge, in conjunction with the
loans officer, to find the one that best fits your circumstances.
The Loan Officer's job
is to rent money at profitable rates of interest with a minimum of risk.
The loans officer needs to feel comfortable that he/she has recommended an
astute investment, predicated on tested principles of lending (business
plan with financials from which ratios can be developed), when your case
is presented by the officer to the bank's loan review board.
Mortgage
Lenders
The institutional providers of first level mortgage
lending include the Insurance Companies, the Banks, the Trust Companies
and the Pension Funds. There are also long term mortgage loan financiers
to be found in the private sector. The twenty-five year long term mortgage
though, has largely disappeared; a maximum five year term reflects the
character of today's long term mortgages. Many of these smaller private
mortgage financiers advertise their services aggressively, especially
where those offerings relate to mortgage extensions on property in strong
real estate markets (such as the Lower Mainland market).
A first mortgage will
earn the lender approximately 12% interest, a second mortgage, 15%, and a
third mortgage, 18% - 20%. These lenders can be easily located and your
approach to them assisted (or prepared for you for a fee) through
consultants known as mortgage brokers (provincially licensed and bonded).
Approaching
the Sources of Mortgage Financing:
Mortgage financiers must
normally be approached with a prepared proposal, which will be judged on
the basis of who the borrower is (i.e. personal financials); the type of
building and its use; the location of the property; its condition of
repair; its value established by professional appraisal, comparative
sales, cost and income; the company balance sheet; and the projected or
actual cash flow. Again this approach can be prepared for you by
contacting a provincially licensed and bonded mortgage broker.
(Long) Term
Loan Lenders
The providers of basic long term loans include
the Banks, the Trust Companies, the Insurance Companies, the Pension Funds
and various Loan Specialists.
Approaching
Sources of Long Term Loan Financing:
Term loan evaluation
tends to be more rigorous and sophisticated than mortgage loan evaluation.
In summary, this lender is evaluating the abilities of the management
team, the collateral available to support the loan and the commercial
viability of the situation, as indicated in the projected financial
submissions.
This evaluation will
normally require a detailed business plan (in a bound presentation format)
which provides extensive information on the management of the company or
project; a detailed history of the business, its products, its production
methods, its operations, its position in the marketplace; the purpose for
which the loan is intended (in intimate detail); any security available to
be pledged; and extensive financial information and projections.
Equipment
Financing/Leasing Lenders
The providers of term loans to
finance equipment include the Banks, the Trust Companies, the Insurance
Companies, the independent sales finance companies and, on occasion, the
equipment vendors themselves.
Approaching
Sources of Equipment Financing/Leasing Lenders:
These
financiers (the commercial banks, the trust companies, the credit unions)
look for many of the same proofs of commercial viability that the Long
Term Loan people require. Again, a bound business plan is in order.
Remember to make the financial information in the plan easy to locate. The
role of the loans officer in the commercial banks is to prepare a loan
summary report from your information, which will be submitted to his or
her loan supervisor with the officer's recommendation to support or
reject. These financiers are eligible under the SBIL program loan
guarantee.
If the purpose of the
business plan is primarily to procure the capital financing to purchase an
expensive new piece of machinery or to upgrade an existing production
line, include a dual scenario financial argument. One full set of
financial projections should be provided utilizing the existing numbers
and the current equipment situation (balance sheet, cash flow and income
statement). A second full set of financial projections should cover the
same period of time and show the situation as if the new equipment were in
place (balance sheet, cash flow and income statement).
Include an expectation
of the useful economic life of the new equipment and resale value over the
course of its useful life.
Sales finance
companies, in cooperation with the equipment suppliers (vendors) commonly
offer sales finance programs and lease-back options on their equipment.
The onus is upon you to ask your vendor if he/she has access to any such
finance programs, or if the vendor will finance the purchase directly.
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