BankingCourse outline

Module I RelationshipsDetermining your financial/banking support needsChoosing your financial service providerDeveloping banker relationshipsYour banker as a part of your support team

Module II Managing financesA banker’s perspective on loansBuilding an effective borrowing strategy Managing Cash FlowTracking for warning signsUnderstanding a line of creditGuaranteeing you business loanThe investor alternative

Module III ResourcesProtecting your creditGovernment guaranteed loansWorking with your bookkeeper and accountant

Module IV Thinking in the future tenseKeeping harmony between your personal and your business accountsPeriodic reviews

Course objectivesAt the conclusion of this course, the learner will:• Have a broad understanding of the banking system; its resources and opportunities

as it applies to micro enterprises• Be aware of the needs, limitations and resources of your professional banker and the

ways in which you can leverage these to your benefit• Understand the financial responsibilities that you have as a business owner and ways

in which your banker can help you to meet those• Understand bank charges and how to minimize them• Have a greater appreciation of business risk and ways in which you can minimize risk• Learn a number of ways in which you can save time and money using such things as

online banking, business credit cards and electronic funds transfer• Gain an appreciation of loans and lines of credit; managing their balances and

payments• Be well prepared to ask for a loan• Understand the principles in security and guarantees • Know how to approach your banker when you forecast a difficult period ahead

Determining your financial/banking support needs

• From the very beginning you must be aware of the pitfalls of starting a business without adequate financial resources. While it is possible to start some types of companies with lesser funds (particularly online), most new ventures will require you have the means and financial commitment to fully invest.

• Understand that for all intents and purposes except in very unique circumstances there are virtually no government startup grants and you will therefore have to rely upon your own savings initially and possibly loans or a line of credit as your plans unfold.

As to the amount that you need, beyond some initial pre-development funds which may be as little as 1or 2 thousand dollars, your business plan will tell you how much you will need – and if you are planning to borrow money, just how much you will need and your re-payment strategies

Make sure that your financial projections are realistic; both in terms of total monies needed; at what point they are required and also making sure that realistic repayment terms are included.

• Never overlook your personal need for an income; if you don’t account for this initially you will find yourself living off your diminishing reserves or bleeding your line of credit and this is the beginning of a downward spiral.

• You may have decided that your business concept is an ideal one for investors. Bear in mind that the only similarity between a banker and an investor is that they both come with money. See finding an investor.

Choosing your financial service provider

• There are advantages to setting up your business account with the same bank and branch that you may have dealt with for some time for your personal and household banking needs.

• At the same time, bear in mind that business banking requires an entirely different approach on both your part and that of your banker

• Canadians are fortunate to have a strong stable banking system with enough players between the chartered banks and the Credit Unions but as a result Canada has avoided the pitfalls encountered in the US where there are over 2,500 independent banks

• Don’t hesitate to ask to meet with the bank’s small business specialist which you can find with some of the more progressive banks. You should have a list of questions that you can ask him or her – but be brief, while your account may be your only consideration, they have hundreds of other clients to service and your appreciation of their time constraints is all part of building that atmosphere of trust and respect

• Some observers say there are distinct advantages to using a suburban or rural bank in that it easier to get to know the Customer Service Representatives (CSR’s) or what we used to call ‘tellers’ you may also get to know the branch manager and he or she might get to know I bit about your business. All of this will stand you in good stead in building your banker relationships

• Whether you use a suburban branch or the main branch; a credit union or a charter bank, you need to set yourself a realistic criteria as to how that bank relationship will grow. A good idea is to build two columns to your list; what you expect from the bank and what they have a right to expect from you.

Developing good bank relationships

• A good banker should be highly interested in your aspirations and embrace this challenge. They might recommend you structure your accounts differently; you might save differently or invest differently.

• They might look at some of the sensitivities around your cashflow projections and interest rate assumptions.

• They should understand the fundamental pressures and requirements of your particular sector.

• They might even challenge you back on how you are going to meet your growth projections.

• At the same time you have a number of responsibilities if you want this to work. They include always making payments on schedule; never abusing you line of credit or business credit cards by maxing them out.

• Always treat your banker as the professional that she is and you will have created a first class advisor and a relationship that can last you for years

Your banker as part of your support team

• You might be surprised to find out how easy it is to build yourself an advisory board to share their experiences with you as you build your business. Look to younger retirees with business skills – finding at least one of them who has experience in your field.

• In addition to this advisory board, using careful management you might build a second group of professionals that can assist you. This group includes your bookkeeper, accountant, perhaps the lawyer who helped you set up the business, your business coach (through Startup Interactive) and your banker.

• Unlike your advisory board, they are not going to meet regularly to advise you but are usually available for a quick phone call on a specific issue. Your lawyer and your accountant might bill you for the time involved but if you have kept all of them engaged in your business development their quick answer might save you money or even save the day.

• Your banker in particular can often give you a quick response, perhaps helping you with a short term extension of your line of credit or a separate short term loan to take advantage of an opportunity. All of this is much easier if you have kept him in the loop.

Your banker’s perspective on loans

• Remember that one of the greatest ways a bank makes money is by loaning out the same money to people like you. Their income depends upon the ‘spread’ or the difference between the price they must pay to acquire the funds and the rate of interest they charge you as the lender. As such the banker must be reasonably certain that the money she authorizes to loan to you will be repaid, in full, efficiently, with the lowest level of risk and within an agreed time frame and at the best rate of return to the bank and ultimately to the benefit of the bank’s shareholders.

• Once that is fully understood you are in better shape to ‘get inside the head’ of the banker and to subsequently draft all your proposals and to maintain your accounts.

• So as you approach a loans officer or small business specialist, bear in mind that he or she needs immediate answers to the following;

• Amount: How much money are you looking for?• Purpose: What do you intend to do with the money? Examples might include a new or additional

vehicle; moving costs to a larger premises; the money to build a prototype of your product to present it to the market etc. Explain in reasonable detail how the money will be allocated – always pointing out that this expenditure will ultimately lead to greater prosperity for the company.

• Time Frame: With its use documented, you will be able also to estimate a length of time for repayment. It might be once you have completed a contract or in the case of a longer-term loan you will agree upon a specific term for repayment

• Fail Safe: Your banker will be very impressed if you can show her your backup plan in the event that trouble develops due to unforeseen events. It might be that your last-resort plan is to cash-in part of your personal savings or that you have a guarantor in the family who would co-sign your loan. Keep in mind that even though you might have put up some of your home equity to guarantee the loan, the bank isn’t really interested in ever foreclosing on your property – way too messy.

Building an effective borrowing strategy• Let’s say you’re a retailer or you are selling something online. You will have thought

out your product mix; deciding which items to carry and which ones just won’t work for you.

• It’s a useful metaphor for your financing strategy in that there are numerous ways to borrow money and you should decide early on which ones could work best for you. Many of the options depend upon your own age, gender and industry sector. For example there are loans aimed young people under 35 and loans for women entrepreneurs but if you don’t fit either of these categories you can look at conventional loans with either a bank or Credit Union. Among their offerings you could consider whether a term loan is appropriate or is a line of credit more useful. Usually it’s a combination of both. You also need to determine what rate of repayment you can comfortably handle and what you are prepared to offer in the way of security. Bear in mind that the regulations say that you cannot use an RRSP for securityAs part of your borrowing strategy, many business writers will tell you that you should always borrow a little more than you think you need (perhaps 10%). Most of the time your expenditures will be greater than planned and it gives you a small cushionAs you do your month-end financial review with your bookkeeper, always examine your borrowing plan to see that it’s still on course and if any part of it is not working, don’t be afraid to sit down with your banker or have a chat with your accountant.

Cash flow

• Cash flow, or working capital management, can make or break your company. For small, entrepreneurial companies with limited credit lines and access to funds, it can be the difference between success and failure.

• Terms like “break-even analysis” and “depletion” sound more intimidating than they actually are. This chapter will help you understand the basics of cash flow and how to apply it to your small business. However, the essence of cash flow is awareness of where your money is (bank account, petty cash, GIC), where it is coming from, (accounts receivable, line of credit), and where it is going (bill payments, rent, salaries). That’s all there is to it!

• Sounds simple, but don’t be deceived. Lots of companies have gone belly up, despite being very profitable on paper, because they didn’t have enough money coming in fast enough to pay bills. The following sections will show you how to avoid that situation

Tracking for warning signs

• In Tough Times, the Tough Get Going• Every business goes through tough times.  If your business hasn’t

experienced one yet, just wait, it will. Tough times come as a natural result of business growth (too much or too little), changes in economic conditions or market demand, changing technology, illness (primarily yours) and a host of other reasons. Tough times can even come as a result of something good happening to your business (such as a very large order you can’t handle) so how can you prepare for tough times, or navigate the waters, if you’re in them right now?

• Practice Prevention • Watch for Warning Signs • Build Financial Strategies • Know the state of your finances at all times• Ensure revenues are greater than expenditures• Track Your Sales –• Manage Your Marketing• Keep an Eye on Your Competition

Personal guarantees

• When you think about borrowing money from a bank for business use, you’ve no doubt figured that you don’t want to add a personal guarantee. Sadly that’s almost never done by banks these days since they always want to be in a position to seize some asset if the loan goes sideways. Business owners, understandably, hate personally guarantees. Lenders, understandably, love them. But there’s an old line that says “the golden rule is that whoever has the gold, makes the rules”. To prepare for that conversation, here are the realities about personal guarantees.

• If you have an open line of credit or term loan, that may spell trouble when your lender receives your last year’s financial statements. If your business or personal real estate is pledged on the loan, and that asset had diminished in value, this reality will no doubt enter into the conversation as well.

• The fact is, most small-business owners — particularly those with under $5 million in annual revenue — personally guarantee company debt, and they pledge personal real estate as collateral. Many credit card companies even require personal guarantees on business cards.

• Guarantees are required whether you’re organized as a sole proprietorship, partnership, or corporation. If there are multiple owners in the business, each will be required to sign (parties with less than 5% ownership are sometimes exempt). And regardless of your sex, race, color, or charisma, your spouse may have to sign as well. (To the letter of the law, the bank can’t force your spouse to sign a guarantee, but the reality is that if they don’t, you probably won’t get the money.)

The investor alternative• Do you watch the TV show; Dragon’s Den? If you haven’t formed the habit yet I suggest

you do so. For those who don’t know, the show features 5 multi-millionaires who sit and listen while an entrepreneur pitches his company or idea and invites the dragons to invest a specific amount in return for a fixed percentage of the company. The dragon’s are looking for the answers to six critical questions;

• What were your sales in the past twelve months?• What were your retained earnings after all expenditures including salaries?• What is your margin of profit ( the difference between your costs and the selling price)?• Can your idea be replicated by someone who could hijack your market?• Do you hold a patent or copyright on the product?• What is your skills base and experience that you bring to the project?• If you can provide positive answers to each of these questions, you might be ripe for an

investor. If you can’t, it’s unlikely that you will get the their attention.• As you can see the examination is much greater than anything that a traditional lender

might look to.

• http://www.theglobeandmail.com/globe-investor/investor-education/investor-clinic/clinic-video/looking-for-investor-clinic/article1411321/

The investor alternative II what are you prepared to surrender?

• Always bear in mind that that the only issue that concerns the investor is to follow the money, he/she doesn’t have the emotional investment that you do

• The entrepreneur that doesn’t get to first base is the one that hasn’t done her homework (see previous screen)

• If you are considered a startup company looking for investment, be prepared to surrender 50-51% of the enterprise. Investors who are prepared to take a flyer want to be sure that they control the purse strings.

• If your company has matured to the point of significant sales then you might attract investment in return for a smaller share of the company.

• Even after you have prepared written responses to all of the anticipated questions you need to build a different version of your business plan, which is known as a Business Opportunity Document (BOD). This will lay out the role of the investor and most importantly detail an exit strategy showing how the investor will get repaid or have the opportunity to change the nature of the investment into permanent share or debt etc.

Protecting your credit

• Your credit• What affects A number of factors can affect your creditworthiness as a business. The ground

rules may differ in detail from your personal credit profile but essentially the basics are the same. If you as the owner of a small business has a credit file which shows that you payables are all met in a reasonable time frame and that long-term commitments are consistently met such as property and equipment leases then you will be fine. The reason credit-reporting agencies track your credit performance is to help their member companies; suppliers and lenders who have to deicide which companies to do business with. Many a potentially great deal has gone sideways when one of the parties to the agreement finds a bad credit report on the other and quite reasonably gets concerned about the ethics and ongoing performance of the agreement.

• Just like any intelligence gathering agency, the credit reporting agency employs a number of resources, collecting data from retailers, publicly-accessible government records and banks as well as a number of privately-published newsletters on who’s suing whom and bankruptcies.

• Private and public members of the credit rating agency want to know how you pay your bills and sadly may use this information to assume other negative or positive things about how you do business. The level of your rating can influence the re-payment terms that suppliers extend to you and the specific interest rates that banks apply to your business loans. To ensure that you stay in the best light follow some of these simple strategies:

Protecting your credit II

• Know what’s in your file• Make it a habit to regularly review your business credit (and your personel one while

you’re at it). Read it carefully. Be especially careful to spot errors and yes, they do happen all the time. Check for errors and old accounts still listed as active. Make sure that your relationships with larger suppliers are listed. These simple steps can give your comfort, knowing that anyone evaluating your company will receive positive information.

• Keep it current• Don’t be lulled into thinking that you can check it and forget it. While you know that

the credit rating agency is ethical, they can easily overlook good reports or put negative stuff into your file that doesn’t belong there. They might also have information that is neither good nor bad, just simply out of date. If you find that there is no mention of a particular supplier or other creditor, ask them to file an update on your behalf.

• Obtain bank loans with security• If you’re in a position to put up security for your bank loans or line of credit, it’s a great

way to cement your credit-worthiness. Your banker will be very cooperative knowing that his bank’s risk is minimized, from this, you can leverage subsequent loans with a smaller degree of security. And with every loan payment you make your credit rating is further improved. Keep in mind that with a fully secured loan, you’re in a position to negotiate better interest rates and terms.

Working with your bookkeeper and accountant

• Whether you call it bookkeeping, accounting or just record keeping it is the single most important function of your business for two very different reasons. The first is the critical importance of knowing whether your business strategies of production, pricing, distribution are working. Cost accounting and detailed record keeping for example can tell you if the dollar difference between your cost of the development of each unit and the selling price is sufficient to create a profit. Without accurate records, you may just be guessing.

• The second point is the need to satisfy your board members, (where they exist) and your banker and eventually the tax office, that you are following generally accepted methods of accounting.

• While using an outsider such as an independent accountant brings objectivity, using your own bookkeeper who may be a part time person means that you have someone who understands the books and understands the company as well. Combining those knowledge areas can make your bookkeeper a vital part of your team.

• A professional accountant might be a cost that you can forego initially unless your corporate status is such (not a sole provider), that you need an accountant to sign off on your tax returns. Otherwise you can stick with the bookkeeper. Later on as the company grows you will find the expense of an accountant will be money well spent.

• Whichever professional you choose you can keep your costs down and their services more efficient if you practice good organization procedures by sorting out your mail every morning putting them into the appropriate envelopes as bank statements; payables; receivables and anything that will subsequently lead to payment such as packing slips. Providing all this to the financial person on a regular basis will ensure a smooth operation and keep you out of trouble.

Personal versus business banking

• If you are operating as a sole proprietor your business and you, are one and the same as far as the tax man goes. However running both of these considerations under one account can be deadly and is usually only done by someone who is simply making themselves a job. Even as a sole proprietor (as opposed to a corporation) you need to open a business account in the name of the company and keep it totally separate from your personal financial dealings. By the same token you should avoid using your personal financial reserves as a way to prop up the company accounts. If you find that you are starting to subsidize the business with your personal credit card, you are at the beginning of a downward spiral and few companies ever pull out of that dive.

• By ensuring that your accounts are kept separate, you’ll have the vital controls that you need. If along the way you see the company getting into trouble (your bookkeeper will have alerted you to this early enough to take action), then you can address that with a set of strategic moves which you would have thought out earlier in anticipation of that happening.

• On the other hand if you see your personal finances heading for trouble, it may be that you are not taking enough of a salary out of the business account in which case you need to take a different set of steps. And as a typical entrepreneur, see if you can adjust your living expenses such as getting longer terms on a mortgage or some other loans that you might have.