There’s the old saying that you need to spend money to make money. But sometimes we don’t have enough cash on hand for the things we know will support an increase in revenue down the road. That’s where a loan can be helpful.
Ani Modi, Senior Manager, Business Development, offers this advice on what information to bring with you to a meeting about a commercial real estate loan or a general commercial loan – two asks he regularly supports business owners with at CWB’s Mississauga Banking Centre.
Commercial Real Estate: What to bring – appraisal reports, environmental assessments, information on current property assets, historical financial statements, financial reporting, financial projections, and bank statements from the past few months.
General Commercial: What to bring – Accounts payable and accounts receivable (90 to 120 days), financial statements from the most recent quarter, financial reporting, financial projections and bank statements from the past few months.
Modi adds that information about your shareholders is also quite useful to have with you when discussing either a commercial real estate or a general commercial loan.
“Letting us know who are the owners, what’s the percentage of ownership, what is the type of corporate entity – is it a corporation, is it a partnership? And including a personal net-worth summary of who the shareholders are can also add a lot of weight,” he says.
Another thing Modi says he’s often asked about is what the bank will accept as collateral – which is an asset that’s used as a form of protection for the lender if a borrower defaults on their payments. He says common forms of collateral he deals with include accounts receivables (tip: he says insured accounts receivables helps in providing higher margin limits), real estate assets, and other securities.
When it comes to how much the bank will lend to a client, Modi refers to the phrase Loan to Value Ratio – or LTV – and explains this is an assessment of lending risk that financial institutions and other lenders examine before approving a mortgage. He says CWB's funding will go up to a certain range for owner occupied real estate transactions, but adds it's really dependent on the situation.
As for how long it takes to get a loan approved, he says this can also vary based on the circumstances but clients should generally expect a timeframe of between six to eight weeks. He notes this length can sometimes be reduced for smaller amounts or for scenarios where an existing client is facing a looming closing date and needs to act quickly. “We’re certainly open to weighing the situation and working with our clients where we can,” says Modi.
Once a loan’s approved, there are of course certain terms that need to be followed. In the world of loans, these terms are known as covenants – or promises in a formal debt agreement that certain activities will or will not be carried out or that certain thresholds will be met. Covenants are often put in place by lenders to protect themselves from borrowers defaulting on their obligations due to financial actions detrimental to themselves or the business.
Why is it important to abide by your covenants? Assistant Vice President, Business Development Trevor Palmer, who’s based out of CWB’s Leduc Banking Centre in Alberta, says to think of a covenant as kind of like a wedding vow.
“It’s like saying to your spouse on your big day, ‘I promise to do this and that’…and then you turn around and do the exact opposite. It’s pretty safe to say the consequences of doing something like that probably aren’t going to be too positive.”
Similarly, breaking your loan terms can leave a black mark on the relationship with your banking partner and can impact future financing. That said though, Palmer adds if know you’ll have to go against a covenant, giving your financial institution a heads up in advance can help soften the blow.
“Like any relationship, it all comes down to trust and communication,” he says. “It’s one thing if you find out, for example, that someone has been hiding the fact that they’re repaying themselves. But if you’re honest about things and tell us what’s going on, we’re willing to work with you on solutions. We understand that people are human, and nobody’s perfect.”
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