Canadian paper currency is shown in this undated photo.Kip Frasz
Alec Morley, senior vice-president of small business at TD Canada Trust, fielded questions from readers in an online discussion on Feb. 8.
When the hour was up, several queries remained about strategies entrepreneurs can employ when seeking loans.
Mr. Morley took some extra time to answer them. He has nearly 20 years of banking experience, and since joining TD in 1994, he has spent time in retail banking, commercial lending, asset management and infrastructure technology. His experience stretches across three continents, having worked in Africa, Europe and North America.
From Trevor Moore: I own an Ecommerce Web business. We are experiencing some strong growth and see a lot of potential for the future. We do international business, working with a supplier in the U.S. that does our shipping for us worldwide. We need capital for new employees as well as opening a warehouse facility in the U.S. Are there potential grants or low-interest loans available for companies like ours?
Alec Morley: Well done on launching a successful business … you represent the future of the Canadian economy. One of the lessons we learn as business bankers is that it's actually possible for companies to grow too fast – in other words, the emphasis is on pure growth rather than on profitability and therefore sustainability. The other thing we commonly see is that fast growing companies often don't have enough working capital – the basic investment to fund their growth. While the bank can fund a portion of that working capital, the company needs to share the risk and contribute their fair share too. And if your company is growing rapidly, it means there's a need to keep adding to the working capital base as you grow. If you're not able to get all the capital from your bank, then you should also try the Business Development Bank of Canada or find some investors to help give your company a solid financial foundation.
From Helen R: My husband and I are looking to open a restaurant. We are looking to take advantage of the government backed small business loans. I understand we need to show plans to cover the debt load and bring our share of investment to the party, but what else should we do to help have the banks look favourably upon us?
Alec Morley: Hi Helen. As I'm sure you know, the restaurant business is tough work with an almost unlimited number of competitors – especially in the bigger cities like Toronto and Montreal. When apply for a loan, the bank will want to see what you have mentioned: an ability to cover the debt load – ideally a source of income separate from the actual restaurant – and a proven record of sound debt management in your past personal dealings. Best of luck.
From Dennis: How can the banks use the argument that their cost of raising funds is increasing so they have to pass that on to their customers when GIC and such are at such a low rate?
Alec Morley: Hi Dennis. I know it sounds straightforward, but it's actually a bit more complicated. The past 18 months have been unusual for the financial markets, and there was a period when cost of funds were very high, although they have stabilized somewhat. We fund our loan book in part from customer deposits, like GICs, but we also have to access the capital markets, and it has been the cost of obtaining these wholesale funds that has spiked over the past 18 months. Thanks for your question.
From Alex: We have purchased commercial unit $350,000 and TD has declined our application with 20-per-cent down under CSBFL. We have good credit histories. I don't think TD Bank small business program works.
Alec Morley: Hi Alex. Thanks for writing in. Hard to say without knowing the full situation, but a good credit history is only part of the picture. The CSBFL program is a great program with a number of requirements. I would encourage you to speak with your local branch and ask for a more detailed explanation.
From Boriskluck: Alec, similar to the earlier question on investing in a franchise business, I am in the due diligence phase validating a business services franchise. It will require an initial capital investment of about $100,000 and I estimate as much as $100,000 in working capital in the first 6-12 months to get to cash-flow positive. My bank has suggested that tapping my home equity line of credit would be better than trying to secure a business loan. Your thoughts?
Alec Morley: Hi Boriskluck. Well, again, that may be the quickest and simplest way to move things forward, but I'd perhaps get a second opinion from a trusted accountant and possibly from a small business adviser at TD Canada Trust. There may be other ways to structure your business affairs that would be advantageous. Having said that, many people do use their home equity as security for a business loan. All the best with your new venture!
From Gordon Perry: How long or how big does a small biz need to go before the bank will release its owners from personal liability, five years of profits? 20 years in business?
Alec Morley: Good question Gordon. There's really not a set answer. It will depend on the underlying business, the industry, and of course the way in which the borrower has handled their dealings with the bank. We understand the desire to be free and clear of personal liability. If you think about it from the lender's perspective, there's an equal desire to have the borrower provide an ongoing gesture of good faith. Keep in mind though that even a long-running and formerly highly profitable business can take a turn for the worse, and we've seen that over the past two years. This is another reason why banks, at least Canadian banks, may seem to be careful in all their dealings.
From Jenn Layman: I am a self-employed entrepreneur. When I started my consulting business, no one would lend to me because I had no assets and not enough cash. I am now in my third year, and have doubled revenues every year so far. I would like to amalgamate my credit cards into a line of credit, but still don't qualify. My "net income" is too low. However, when you are smart about write-offs for self-employed people, your net income will always be low. How do you get a bank to understand this?
Alec Morley: Hi Jenn, that's a tough one, and I can understand your challenges. Generally your largest creditor is most likely to consider re-financing. But it is tough to borrow money if you don't have assets and your net income is low. Perhaps you can provide tax return documentation to show how your write-offs deliver higher income than otherwise appears. In the meantime, I wish you continued success growing your company.