Lender loyalty

Author: Michele Lawson

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With banks backing away from many commercial-lending opportunities and private investors skittish, a mortgage expert says companies are no longer in the driver’s seat when it comes to inking business loans.

Now’s not the time to threaten banks to take your business elsewhere, says accredited mortgage professional Chris Doughty. With banks backing away from many commercial-lending opportunities and private investors extremely skittish, Doughty says companies are no longer in the driver’s seat when it comes to inking a business loan. “Stay loyal to your lender,” recommends the Dominion Lending Centres specialist. “Are their rates a bit higher? Tough it out. Once you walk away, there’s a good chance they might change their mind.” Today’s economic reality has shifted the power – and the tolerance for risk at Canada’s big five traditional funders has all but disappeared, he adds. “As soon as U.S. markets collapsed, so did commercial lending in Canada – from a banking standpoint,” he explains. “You don’t want to try to bully the bank into giving you a better rate because it might backfire on you. “It might have worked two or three years ago, but it doesn’t work today.” Doughty, who is based in Penetanguishene, has owned Midland’s Canadian Tire Gas Bar for 10 years. For the past five, he has also been working in the lending industry as a generalist. He has, however, developed an increasing specialty for commercial work. While he sees the markets starting to recover, he expects it could be as long as 24 months before banks ease up on their guidelines. The good news, he says, is “there’s still money out there – you’ve just got to know where to look.” When he was first asked by clients to help find non-traditional commercial lenders, he promised to look into it. “When I started to do mortgages five years ago, I never knew about all these other investors,” he recalls. “I’ve done a lot of research since then.” He now has an established network of private investors and investment consortiums who continue to be interested in good investment opportunities. While traditional investments might not be yielding great returns right now, “if you work it out, these guys are making up to 14 per cent on their money – that’s huge,” he says. As a result of his position in this shifting environment, this past winter has been very busy for him, he reports. “Business will always carry on – it’s just getting trickier and trickier to find the money to carry you,” he says. “People are desperate – they’re looking for funding and someone has to fill that need.” Although he admits not as many proposals are getting picked up as before, there is still significant movement. He has received many more calls for commercial lending since the banks started to say no, and has even had business referrals directly from the bank. “If the deal can be done – if it’s workable, I can usually get it done,” he says. To maximize the potential for success, he suggests companies research the brokers available and choose someone they can trust. Then stick with her or him. “Sometimes customers are their own worst enemies,” he says. “I see it all the time. People get impatient and get other brokers involved. Then all these brokers are shopping the same deal – eventually the deal runs into itself. “Lenders think it’s credit seeking and wonder what’s wrong with the deal – and then no one will want to touch it. People have to find a broker they trust and let them do their job.” Doughty also recommends preparing fully before applying for funding so everything is on the table from the beginning. “Nothing happens on a handshake anymore,” he says. “Lenders don’t like to call back asking for more information.” They also don’t like to feel details are being withheld, he adds. Doughty has seen investors pass on a deal instead of waiting for answers. But the work doesn’t stop once the deal has been signed. Unlike mortgages, business loans for start-ups, product development and growth are constantly being re-evaluated. Keeping investors happy is vital. “If a venture capitalist thinks there’s something wrong, or the investment is going sideways, he will call in his loan or stop funding,” warns Doughty. “There is far greater risk – if you don’t have the corporation set up right, you can lose everything.” A good corporate lawyer is an essential part of the management team, he stresses, for corporate structuring and ongoing advice, and in the event of a problem. Knowing the best way to structure the funders themselves is also important. Venture capitalists like to see a factoring company (which will buy receivables up front) in place to complement the capital loan to ensure cash flow and loan repayment. “It creates a much better comfort across the board,” says Doughty. But once the structure is in place, the key to retaining investors is communication. Whether a big order was just taken, or a purchase was made, he suggests sharing the news with investors. “When you have a lender behind you, you want to make sure he knows the money is being used wisely and there is no mismanagement of funds.” And if there is a problem, “divulge it immediately,” he says, “because it’ll come out in the end.” Having the proper insurance in place can often mitigate disasters quickly and demonstrate professionalism if something goes wrong, he adds. Sometimes, an investor will provide additional funds to weather the storm to protect the initial investment. Shannon Bisset, founder and president of the rapidly growing Barrie-based business CUBE IT Portable Storage, has attracted and maintained several private investors over the past year. She agrees that regular communication is essential. “It’s important to make sure they know what’s going on in the company – both the ups and the downs,” she confirms. “And every business has downs. Everybody expects you to operate within the reality of the current economic situation.” Enjoying significant growth since she opened the doors in 2006, Bisset has worked quickly to establish company systems and procedures. As a result, despite the recession, she has expanded into new markets with the help of franchisees, and grown the business thanks to investors that share advice in addition to capital. “There’ll always be a need for moving and storage,” she says of her high-end do-it-yourself business model that combines cost savings with convenience. “We’re well positioned.” While she keeps an eye on the global economy, she keeps her primarily attention on more direct matters. “We’re very focused on driving sales,” she says. “We monitor and track all our activities so we know what’s working and what’s not working.” This gives her concrete data to report. Regular email correspondence with investors helps her discuss overall strategy, while weekly meetings via on-line conferencing allow her to stay in touch with her franchising partners. All developments and lessons learned are shared. “The good, the bad and the ugly,” she confirms. “Some companies will try to sweep things under the carpet, but it’s not a good idea,” approves Doughty. Such open-communication policies are being encouraged and adopted across sectors in both privately help corporations and publicly traded companies as well. In a recent alert issued by the Canadian Institute of Chartered Accountants (CICA), business leaders were urged to provide transparent financial communications to attract and retain investors. “The alert provides suggestions about matters that may need to be discussed in the MD&A (management discussion and analysis) to provide the transparent and complete communications that investors will be expecting,” said Chris Hicks, the CICA’s knowledge-development principal. “In particular, the MD&A should explain, through management’s eyes, the effects of market volatility on an entity’s performance, financial condition and future prospects.” Specifically, a well-prepared MD&A should detail strategy and risk management, a results analysis, liquidity, critical accounting estimates and an entity’s ability to continue as a going concern, according to the CICA. “Entities should take extra care with their MD&A to ensure that it communicates a transparent and balanced reporting of management’s insights about the entity’s prospects,” said Hicks. “To achieve this, entities may wish to reconsider the overall structure of their MD&A. Communicating how an entity is dealing with the current financial crisis, where past results may not be indicative of the future, will likely involve some significant changes.” It is an effort to guide companies through the development of supplemental financial statements, says Midhurst-based accountant John Nixon, of John O. Nixon Chartered Accountant. It is in response to the sub-prime problem in the U.S. that threw the world markets into turmoil, and is directed specifically to publicly traded companies, he adds. “There are really unsettled investors out there and you just want to give them as much disclosure as possible about how the company is affected and how it will be affected in the future,” he explains. “If you do provide them with reliable information that you believe is the best to your knowledge, you will have investors who are comfortable and confident in investing in your company. If it makes sense and they can see a clear picture of where you’re going and what environment you’re working in, there’s a comfort level there. “If you put yourself in the investor’s shoes and you say this looks good, and two months later it’s not even remotely close to what was said, you lose confidence in what is said in the future.” The bottom line is providing enough information for investors to assess their risk, he adds. Nixon, who has been in public practice for more than 25 years, has been running his own business for almost four. These days, he works more with private companies and not-for-profit businesses than with companies that answer to shareholders. “I like to deal with clients on a more personal level and take the time to get to know them and their company needs better,” he says. “Before I was working solely with larger clients, but I wanted to expand my client base so I could work with smaller companies and entrepreneurs as well.” While his current clients may not be tied closely to the stock market, he says they can learn and benefit from this CICA alert. “If a private company seeks a loan,” Nixon says, “the company will want to provide the financial statements and a forecast or projection of where they’re heading, so they’re putting into those numbers their best guess on how the company is going to operate through current economic conditions and future economic conditions. That’s their own MD&A. “They’re investing in you, so how else will they know that you’ll be able to pay it back under the terms agreed to. You want to develop a relationship so they say ‘yeah, we can work with you through the rough times.’” From a management point of view, you want to retain investors, he concludes. And from the investor’s perspectives, “you don’t want any surprises.”