Banking
– Business Loan Application
Operating Lines of Credit and Letters of Credit
You are probably wondering what a series on business
banking essentials is doing on a natural health website.
Well, stress caused by financial worries will
eventually adversely affect your health. Many business owners
operate under constant financial pressure, and this series on
commercial banking and commercial finance will arm them with
the knowledge that they need to deal confidently with diverse
business situations, and with their bank managers. Knowledge
is comforting, it is the fear of the unknown that is stressful.
How can I help you? I obtained my Chartered Accountant
designation (I’m retired now) in Australia. Upon moving to Canada,
I worked for a wholly owned Canadian subsidiary of an American
bank. Over time, I rose to become the Senior Vice-President
responsible for the commercial finance division. This division
granted flexible operating lines of credit, which included letters
of credit for importers. In this career, I encountered numerous
different types of businesses including trading, manufacturing
and importing.
This is not intended to be a detailed accounting
or banking course. I have put together the essential information
you need in order to give yourself the best chance of succeeding
in your business. I shall tell you what your bank manager would
like to hear from you at your meetings. I shall tell you the
early warning signs that your business needs positive action.
These comments are not for retail business; they
apply to wholesalers, importers and manufacturers.
To cover the vast amount of banking information,
even in thumbnail format, I shall break it down into various
segments. Some will apply to your business, others may not.
I am intentionally phrasing the segments in very simple layman’s
terms. I would advise you to discuss my advice with your accountant,
or even your banker, before you decide to act on it.
This first segment deals with the initial loan
application. It is assumed that you are applying for an operating
line of credit, which may, or may not, include letters of credit.
The actual loan within the line of credit will fluctuate at
different times, depending on the cashflow, but the bank will
put an upper limit which you cannot exceed without special authorization.
The limit of the operating line of credit is determined by the
bank after evaluating various aspects of your business, including
your equity in it.
There is certain basic information that the financial
institution requires in order to make the decision to finance
your business. You must come to the appointment with the bank
armed with this information, ideally accompanied by your accountant
who prepared the information package.
From the above documents, the bank will ascertain
whether your business was profitable in the past, and whether
it appears to be profitable this year.
The cashflow projections will show how high the financial involvement
will peak at, and how well the loan will be collateralized at
any given time.
The accounts receivable list will disclose the quality of the
customers and whether a significant percentage of them is delinquent.
The accounts payable list will reveal whether your business
is up-to-date with its payments to suppliers.
The inventory summary will show the nature of the inventory
and give an indication of whether it can be sold readily.
In addition to examining the above documentation
in detail, be aware that a credit check will be done on the
business to ascertain if there is any outstanding litigation,
and as to its creditworthiness.
Knowing all this, be sure to have satisfactory
explanations for any aspects that may appear detrimental to
the bank.
It is important to keep in mind that the ideal
customer for an operating line of credit, as far as the bank
is concerned, is one who:
