How to secure cash in tough times
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In difficult times, you need to work with your bank to stretch your credit.
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There’s a winemaking philosophy that argues it’s the difficult vintages (plagued by poor growing conditions) that separate the talented winemakers from the mediocre ones. After all, anyone can make a wonderful wine in an optimal growing season. The same might be said of difficult economic conditions – marginal businesses will struggle, while those with a plan and steady cash flow will prosper in the end.
Staying profitable is the clear cut objective and to do this you’ll need a focused plan and (gasp!) a good working partnership with your banking partner.
According to a recent survey by the Canadian Bankers Association, the majority of SMEs (small and medium-sized enterprises) – 80 per cent – hold a positive view of the relationship they have with their bank. According to the survey, the vast majority of SME owners identified access to credit (89 per cent) and having a face-to-face relationship (88 per cent) as the two most important factors contributing to their overall impression of their financial institution. To grow, you need to invest in new technology and initiatives and that may require financing. The global credit crunch has caused bankers to snap their wallets shut and that free-flowing credit has suddenly dried up. Financial institutions will be more inclined to give credit to those businesses that have a good relationship with them. In banking terms, a good relationship means knowing clearly where you’re headed and how you will use the capital to get there. It also means demonstrating a way of paying the bank back. When it comes to obtaining credit – it’s all about proving you’re worthy. So just how do you do this?
Start with your cash flow analysis
To be successful, you must diligently track your bottom line. This also involves realistically assessing your financial situation in terms of cash and cash flow. Begin by drafting a monthly cash flow analysis, projecting out one year, which will allow you to identify those times when cash flow will be restricted and then determine if you have financial solutions that will cover those tight cash times.
What sales are you forecasting?
Given the economic climate, it may be appropriate to assume sales decline by 10, 15 or 20 per cent. Take a deep breath and determine what effect this type of decrease will have on your cash flow. Look at your sales volume and determine what kind of a reduction, percentage-wise, you can take in sales and still remain profitable. If a dip in sales is likely, continue to go after those big opportunities even if you’re afraid you can’t handle the resulting demand. This is a good problem to have – in tough times, it’s easier to outsource or create strategic alliances than to get new business into your operation.
Alternative sources
Once you’ve realistically assessed your financial situation, it may become clear that you need to gain access to cash. The first way to do this is to approach your bank to see what kind of loans or lines of credit for which you qualify. By partnering with your banking contact early you’ll be ahead of those folks sticking their heads in the sand. It will demonstrate your desire to survive, and bankers like survivors. Traditional lending products may be unavailable to you because of your company’s lack of history. Don’t despair: your bank may be willing to partner with an alternative lending source that can offer products to bridge the gap until you are in a position to qualify for traditional lending financing. As interest rates come down, you may be able to refinance some of your assets through an alternative lender, giving you access to cash. A short-term solution like this is often all your small business needs to weather an economic crisis until you can qualify for a line of credit or other traditional bank-based product. It is possible for you and your bank to work together to transition to an alternative lender and, later on, back to the bank.
Pierre Luc Poisson of Industry Canada confirms that small and medium-sized businesses are looking for alternative financing. “The Business Development Bank of Canada (BDC), a federal Crown Corporation, reports that bank officials are receiving an increasing number of referrals from financial institutions,” says Poisson. “The BDC’s mandate is to provide financing and consulting services to SMEs that complement offerings by private-sector financial service providers.
Poisson acknowledges that as a result of the current conditions, credit is becoming more difficult to get. “A number of indicators both from the perspective of lenders and borrowers point to tighter credit conditions. The Bank of Canada’s Senior Loan Officers Survey shows that credit conditions have been tightening since mid-2007. This tightening is reflected in both pricing and non-pricing lending practices. There are a number of programs and information sources maintained by Industry Canada to help small businesses access the financing they need to grow and prosper.”
Retailers looking to find out more information about the programs can visit the Canada Business website at www.canadabusiness.ca and click on “financing.” SMEs will be able to access a comprehensive directory of information on federal, provincial and municipal government services, business guides, programs and regulations. The Canada Business Service Centre at 1-800-567-2345 is available to respond to any questions SMEs may have related to the information on this site.
The Canada Small Business Financing Program helps small businesses obtain term loans of up to $250,000 to finance the purchase or improvement of fixed assets such as land, buildings and equipment. The program is delivered by financial institutions on behalf of Industry Canada. Small businesses are encouraged to present their business proposals directly to the lender of their choice, who are then responsible for reviewing business plans and for making all decisions related to loans. For more information on the CSBF program, SMEs may consult this website directly www.ic.gc.ca/csbfa or by dialing toll-free at 1-866-959-1699. As well, they can visit the Business Development Bank of Canada (BDC) website directly at www.connex.bdc.ca. BDC assists small businesses both by providing loans and equity financing to small business and by providing management services such as advice and counselling on how to operate a successful small business.
The upside of these turbulent times will be that surviving businesses will become very efficient and when the economy takes off again there will be less competition. It’s in the economy’s best interest that they support small and medium-sized businesses. As the National Post reported last year “small and mid-sized enterprises contribute about 45 per cent of gross domestic product and employ the majority of Canadians. They are also a key foundation of their communities and provide fertile ground for innovative ideas. As a result, providing financing and banking services to them at competitive rates is essential to the health and success of the economy.” And yes, you can take that to the bank.
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