Bankers and entrepreneurs have different perspectives and different interests. These differences are ingrained, but good times can create a comfort level that obscures them. Now in times of tighter credit and a slower economy, these different interests are thrown into sharp relief.
Entrepreneurs in particular find themselves at a disadvantage. They need capital to operate and grow their businesses, and they must approach lenders to obtain it. At the same time, the financial sector is more prudent than it's been in the past as their financial performance depends on limiting loan losses. The result is "by-the-book" policies that are frustrating entrepreneurs.
"It's important for entrepreneurs to understand bankers' current mindset," says Edmée Métivier, BDC's executive vice president, financing and consulting. "What are bankers looking for? What do they need to see from a client especially when their business is under pressure in difficult economic conditions?"
In the eyes of bankers
- Bankers look to see if the business model is broken. Have market shifts made a company's advantage obsolete? Can innovation save it? Many entrepreneurs are outraged that bankers presume to understand a business model when they've never run a business. But when you work with business models every day of your career, as bankers do, you absolutely understand them. In fact, you develop a consultant's comparative perspective and an eye for best practices
- Bankers look to see if management has a plan. The absence of a plan speaks volumes, but the nature of the plan sends a message as well. Is it merely a survival strategy, or is it a longer-term vision that positions the company for the eventual economic recovery? This often distinguishes well-managed companies from poorly managed companies in the eyes of bankers
- Bankers look to see how committed management seems to be. When ownership and management are not the same, how are they working together? Is ownership ready to man the battle stations or jump ship? Bankers are completely dependent on the managers of their client companies. In this economic climate, they are spending more time making sure they understand what kind of manager you are and what potential you have given your business. This may appear to indicate a lack of trust on their part, or even inefficiency or procrastination. But for them, the level of comfort they feel about a business relationship is essential.
Help your banker to help you
Knowing what your banker is thinking is only useful if it gets you what you need - access to capital. That's why it's important to put the shoe on the other foot, and look at the things you should do before and during your approach to a lender right now. Here's how you can help your banker to help you.
- Plan well in advance if you need financing. Banks are more cautious these days, and less inclined to take shortcuts on their due diligence checks. Turnaround times are slow, so plan for this and set your expectations accordingly
- Prepare to be more forthcoming than you have ever been. Bankers want more information than before. You may not understand why, but there are always reasons
- Firm up your business plan. The more time a banker has to spend straightening out a client's business plan, the less confidence he or she will have in that client's ability as a manager. It's not a good time to make a bad impression
- Don't put all your eggs in one basket. Shop around to find alternative lenders. If you are a large enough company, divide your financing between different institutions. If you are smaller, split your financing plans into shorter and longer-term needs
This last point is made more complex by the fact that there are private-sector lenders and public-sector lenders in Canada. Who should you approach for financing, and for what projects?
Private-sector lenders are eager to help Canadian businesses, but their appetite for risk is limited by protection of profitability and by regulation.
A public-sector lender has a mandate that is driven in part by public policy, so they are often prepared to finance projects that carry more risk.
This does not mean they accept clients that are less creditworthy; instead, it means they can accept projects from smaller businesses operating in higher-risk segments such as R&D-intensive innovation, manufacturing, and exporting. These projects are priced according to risk, so the financing becomes proportionately more expensive.
Are entrepreneurs and bankers destined to one day resolve their differences? Probably not, because a healthy financial system relies in part on those checks and balances. However, there is plenty of room for constructive engagement between the groups. Entrepreneurs certainly depend on it; and, in the long term, bankers do too.
Content in this section is provided in partnership with the Business Development Bank of Canada. BDC provides entrepreneurs with financing, venture capital and consulting services. To find out more go to BDC.ca.