Ian: Welcome to the Business Coach Podcast, an advice-oriented series for Canadian entrepreneurs. I’m Ian Portsmouth, Editor of PROFIT Magazine and I’ll be your host as we tackle the hot issues and opportunities facing Canada’s small businesses.
We’ve developed this Podcast in cooperation with BMO Bank of Montreal. Over the course of this series, I’ll be drawing on experts in a number of fields including some BMO experts in order to provide the credible information and prescriptions you need to run your small business better.
To many entrepreneurs, one of the great mysteries of life is how banks come to their lending decisions. Of course, this notion applies primarily to those business owners who are turned down for a loan despite making what they think is a perfectly acceptable request for credit. So, how do banks really come to their decisions and what can you do to make those decisions fall more often in your favor?
Joining me to answer those questions and more is Bob Bisset BMO Senior Vice-President of Commercial Banking for the Greater Toronto area. Bob, welcome to the Business Coach.
Bob: It’s a pleasure to be with you this afternoon Ian.
Ian: So, can you remind us what kind of lending the typical bank does, because I think there is a general misconception out there as to what banks should or do lend?
Bob Traditionally, Ian, we are a senior depth provider, and that’s, you know, having first claim typically to the assets of a company. It’s a relatively a low cost way to raise capital. As a result, it’s a relatively low margin business for us i.e. our spreads are not too too high and typically less than 2 %. And as a result of all that, we’re generally looking for a lower risk loan category which is really our traditional role under the Bank Act.
Now having said that, Ian, I would also point out that certainly the banks are changing with the times and we know what the demographics look like for business owners and many are transitioning, succession planning is very very important to them, so as a result of that, we’re becoming more and more creative with our financing and doing quite a bit of cashflow lending these days which we find really helpful for our customers.
Ian: So, say, I am a business owner looking for a term loan or a line of credit, what information does the bank need from me and where do you find that entrepreneurs are sort of slipping up and not providing the appropriate information?
Bob: I think it is incredibly important, and I honestly believe this, it’s that the business owner really needs to give some considerate thought and serious thought to what they’re really looking for from their relationship with their banker. And that can take many dimensions. You know, do they want to work with somebody that is part of the local community, they go to the same Rotary Club together, they belong to perhaps the same religious affiliation, perhaps they are a member of the same golf club and so on so forth, and if that’s the kind of relationship that they want. Then again, they could really want to reach out to a set of expertise and the local contact is not that important for them. Is there a particular industry’s specialization or capability they are looking for from their banker? Are there language, you know, unique language requirements that are important to them? And then of course, just the chemistry, you know, is the relationship going to work and really prove to be a win-win one over time.
In terms of traditional things that we would look for in a business proposal, a financing proposal, if we look at what we call a 4M analysis structure which would include markets, materials, money and management, each of those four elements are look at in some degree of detail.
In terms of markets, you know, how you are going to acquire your first business if it’s a new start up, if it’s an existing business, you know, what is your niche, what is your target market, how do you keep those customers coming back time after time and acquire new ones?
Materials, we are looking there at, you know, the basic structure with respect to your distribution and your fixed assets and depending on the nature of the business that you are in. Particularly in the bank’s role, we are looking at inventory, what’s the nature of that inventory, what are the turns, salability and so on and so forth.
Point number three, under the form analysis is money, and of course, the banker will always want to review your historical information, if it’s an existing business, we’ll obviously want to look at your forecast in terms of projected sales, cashflow and balance sheet position.
The last M and certainly in my mind always is the most important is management. What is the capability? What is the credibility of the owners and the investors in this particular entreprise? What do they bring to the game to allow them to be successful in a highly competitive market? And, you know, when we are looking at, one of the things that we find that we need to perhaps work a little bit further on or often have to flush out in a little bit more detail with the owners, is what is really the core to their business model? What differentiates them in the market from their competitors that will allow them to be successful and sustain that success over time. What sets them apart, what makes their customers want their product and service and be loyal to them over the years?
And at the same time, while recognizing that, you know, what are the real trust of their business, you know, what keeps them up at night, what should they be talking to about with their professional advisors and their bankers to make sure that their business stays healthy.
Ian: Now Bob, it sounds to me then that a bank is really looking at credit applicants almost a way a venture capitalist or another investor would, taking a very holistic view of the business and the business owner, but there is this perception out there that banks simply take some numbers, plug them into a machine and outpops a decision. So how much of this is really based on the numbers?
Bob: BMO, Ian, obviously the first think that we want to do is meet face to face with the owners, with the entrepreneurs to really get to understand them firstly. And going back to my comments earlier about the ultimate importance that we place around management and that capability, we would want to do that, ideally on the customer’s premises, if it’s in a plant or if a service industry, in their offices and so on and so forth. So we really get a feel and a sense for the business and what it’s really all about.
With regard to the account manager, what they will do after that initial interview and discussion, there will be a provision of, an information package either that will be forthcoming on the first meeting or [substuent] meetings, they will take that and they’ll begin their analysis process. We have numbers of tools, some that are proprietary to our organization at BMO, some are industry standards with which we would analyze the financial aspects, those models would produce outputs for us but always, Ian, what we do is we apply good old-fashioned judgment to that information.
At BMO, we do not approve our credits and loan applications based on credit scoring, it’s a combination of all the factors and all of the inputs based on an informed judgment which is, you know, made on years of experience and of course on training that our people are provided with at our organization.
Ian: So the individual banker plays a rather significant role in the decision making process and I guess, that means that it really serves entrepreneurs well to really try to cultivate that relationship with their bankers. Is that right?
Bob: By all means. I can’t think of anything more important and I have been in the commercial banking business for 25+ years now and, you know, I’ve developed some wonderful relationships with our customers and referral sources, you know, the financial professionals in the market over those years and I know certainly, in the good times, it’s easier to make sure that things go along well but it’s during the difficult times, especially Ian, that that relationship, that level of trust that you develop with your, let’s call it your trusted advisor, your advisory board for your company, your business, really serves you well.
Incredibly important to minimize surprises if you have information, if you have a question or concern, call your friendly neighborhood banker, have a conversation with him or her and make sure you’re moving down the road together.
Ian: Now we’ve heard a lot of stories over the years from entrepreneurs who say they’ve been wrongly denied credit of course that is their opinion but is there any recourse for entrepreneurs when they apply for a loan or a line of credit and they are denied?
Bob: By all means, I spend certainly once a week, Ian, I would be involved with an entrepreneur somewhere across the Greater Toronto area that feels perhaps we should have been more generous in terms of accommodation, someone that perhaps we have suggested another alternative with respect to their financing requirement. And so, if you are working with your local branch and your local commercial account manager, if the outcome of that conversation or loan application is really not to your satisfaction, if you believe that your business and that your business plan has merit beyond what is being played back to you at the local level, certainly, I would recommend to each and every entrepreneur to elevate that to your account manager’s manager. If that process is not, you know, does not produce the desired result, certainly take it up with your local executive. And that is where I get involved.
And in addition to all of that, of course, Ian, as you know, each of the banks has an ombudsman in place and usually, not too too often, but once or twice a month, I’ll be in conversation with our ombudsman about a particular scenario where we want to review and reflect on the initial decisions that were made and to see if we can do more to really accommodate the client’s request.
Ian: Well, it’s good to know that there is an outlet. Bob, thanks for sharing your expertise with the Business Coach.
Bob: Delighted to do so Ian and look forward to the next opportunity.
Ian: Bob Bisset is Senior Vice-President of Commercial Banking in the Greater Toronto area for BMO Bank of Montreal.
Thanks for listening to this episode of the Business Coach Podcast. I hope you’ve discovered a few insights that will help you grow your business and that you’ll download other episodes from BMO.com, profitguide.com or iTunes. I’d also appreciate your suggestions for future topics or how we can make this Podcast better so please drop us a line at firstname.lastname@example.org.
Until next time, I am Ian Portsmouth, Editor at the PROFIT Magazine, wishing you continued success.