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The Potential Impact Organizational Structure, Size, and Complexity Can Have On A Business Financing Application

I can’t complete this lender profile section without speaking a bit about the organizational size and operational complexity of lending organizations.

Let’s start with Banks.

They typically will provide the lowest cost of funds for deals they approve and fund.  They also tend to be large monolithic structures with thousands of employees, procedures, and moving parts.

There is a saying in the industry that cheap money is slow money.  And when you’re dealing with a major bank, even if they love you and are confident they can help you out with your business financing needs, don’t expect them to help you quickly.

Part of the reason that the bank financing process can be slow is that they are huge brands that everyone knows about and that everyone applies to for financing.  So they always tend to have a glut of applications to go through.

Another thing that drives how long a request for business financing can take are the processes involved and the number of hands an application has to touch, and all the back and forth that needs to happen to get through approval and funding.

This is further complicated by approval and funding responsibilities.  Throughout the banking system, bank managers and account managers have largely been stripped of any credit granting authority.  This was done to remove the bias that would inevitably form when bank employees built relationships with bank clients.  It was also removed to more centralize the management of lending targets and portfolio risk. 

So when you sit down with your banker and discuss your business financing request, you’re truly at step one of what could be a very long process before someone with the right authority can actually issue an approval in your favor.

"Cheap Money Is Slow Money"

Dragging things out even further is the separation between the people that approve a deal and the people in the bank that fund a deal.  Approval and Funding are separate and distinct from each other so that there is independence created to make sure all the rules are being followed.

Put another way, there is no guarantee that any bank approved deal will ever get funded or funded quickly.  It’s the classic we’re both on the same team, but not on the same page or sharing the same priorities.

To be clear, as a business, this type of role separation in the organization structure is important and necessary to reduce the issuance of bad loans or loans that don’t meet the bank’s risk rating, which in turn doesn’t line up with the pricing provided.

But from a time perspective, the overall process takes longer to complete.  How long?  That’s nearly impossible to tell as there are so many factors and people involved, but it’s not unusual for bank or credit union business financing approval and funding process to take several months.  Is it possible things can move faster.  Absolutely.  Is it probable?  No it’s not.

One last thing to mention on this subject is that many banks don’t always formally decline business financing applications.  Depending on when you apply, and how long the process is taking, and how tight the numbers are, they may tell you that they’d like to see your year end accountant prepared financials when they are available before they can proceed further. 

Or they may say they want to see 6 more months of financial results before making a decision. 

Or they may come up with a bunch of other suggestions that push you out into the future, but at the same time don’t give you a flat out “No”.

I’m not exactly sure why they take this approach.  Perhaps its because they may hold your mortgage, RRSP’s, and sell you insurance and don’t want to lose your business.

Perhaps its because they are a major brand and don’t want people constantly complaining about being declined in public.

Perhaps the people you ended up dealing with were too green and lacked the experience or the organizational connections to get your request pushed through the system and properly advocated with a decision maker.

The takeaway here is that if you’re looking for the lowest cost money, make sure you have the time to go through the process.  And if the process is taking too long, develop a Plan B and implement it before you run out of time.

Non Bank Lenders

Most non-bank lenders are nowhere near the size of banks and no where near the operating complexity.  In most cases, these specialized lenders are much smaller organizations with less complex operational systems to assess, approve, and fund business financing requests.

But that’s not always the case.

I would consider the Business Development Bank of Canada and Farm Credit Corporation as non-bank lenders because they only provide B to B Financing, where banks provide both B to B and B to C financing on a much larger scale.

Both BDC and FCC are crown corporation that are funded by the Federal Government.  Both are specialized term lenders and both are pretty large in size, which results in the same complexity challenges as banks.

BDC and FCC are also well known major brands, so they are both going to receive lots of business financing requests over the course of a given year, and it takes time to process larger volumes of activity, especially when your organization is multi layered, national, and full of its own organizational complexity.

Both BDC and FCC are great lending options.  But like the banks, they are not typically going to be very fast.  And referring back to the Risk Management section, these organizations have regional portfolios with their own risk ratings which can vary considerably at any given point in time from one region to another.

Smaller specialized lenders may have multiple locations, but for the most part, they are much smaller in size from banks, credit unions, and crown corporations.  The smaller size, for the most part, results in greater speed.

But that is certainly not always the case.

As we discussed in previous sections, specialized lenders will align their public offering with their cost of funds and associated level of risk.

For specialized lenders that focus on the lower risk end of the market, their interest rates can be very comparable to banks at times.  Even if their rates are higher, they also tend to have greater flexibility in the features they can provide with their financing approvals.  Many times features can be as important as the rate, which helps them be more competitive in the overall market.

Specialized lenders that focus on the higher risk end of the market, typically are closer to banks in terms of their processing, decision making, and funding speed.  This is not due to organizational size or complexity. Its more related to higher risk deals requiring greater scrutiny and many times the analysis process can depend heavily on third party experts to provide reports on asset values, financial performance, industry analysis, etc.  Third party reports not only cost borrowers money to complete, but they can also require considerable amounts of time to complete inspection, analysis, and report creation.

Specialty lenders like equipment financing companies, are focused on making decisions quickly and funding quickly to meet the demands of the market.  As such, speed and additional features can also allow them to charge more than banks and thus have access to a larger market than otherwise would be available to them if cost of money was the only determining factor.

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