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Dealing with Banks: a very necessary evil.

 

by Jack Moore, CA.

Jack Moore has been a practising Chartered Accountant in southern Ontario for 40 years. He has been a consultant/hand-holder to small businesses including two years as the comptroller of The Institute of Chartered Accountants of Ontario (ugh). He also spent two years as vice-president and general manager of a small national manufacturer/retailer.
Let's talk about banks, business and taxes.
 
Banks, in our small business environment, are a necessary evil. In an ideal world, every business would be financed by capital obtained from profits (a dirty word to the socialists) or by injections from the owners. Sometimes it is practical to obtain a loan from a bank. Beware.

Banks are in the business of lending money. Their concerns are firstly to earn interest and secondly to ensure that the loan is repaid. While security is taken from the borrower, it is fair to say that the bank, or other lender, does not like to sue on the security and enforce repayment. Therefore, the more security that can be obtained, the more likely it is that the loan will be repaid without recourse to the courts. It is a given that if the loan is repaid then the interest will have been paid also.
 
Banks are uncomfortable lending money to a small business. If it is a corporation then the security available tends to be inadequate for their purposes. If it is unincorporated (a proprietorship or partnership) then it is a personal loan and treated as such.
 
The lender has no control over the actions of the borrower after the loan is made except in so far as the assets that are pledged as security are concerned. It is in the best interests of the lender to maximise the security which may include life and property insurance, debenture (lien) on all assets of the business (accounts receivable, inventories, real estate, machinery and intangibles such as patents), personal assets (real estate, furniture, automobiles, investments) and the ultimate pound of flesh, the personal guarantee.
 
Do not ever sign a personal guarantee, or pledge assets used in your day-today life, for a lender. If you do not have enough assets in the business to secure the loan then do not borrow. Find another alternative.
 
Banks are extremely paternalistic. They believe that they know what is best for their customers and will act accordingly, so long as it doesn't impinge on their control. Their primary function is to make money (and pay taxes, which is another story). They will change the rules for themselves on a whim if the change betters the primary function. Lip service is paid to informing the customers about the changes and their effect thereon.
 
Banks are a very necessary evil in our financial/economic system. At the same time they are an effective monopoly set up and regulated by the federal government. The directors of the banks tend to be inter-twined with big business owners, lawyers who indirectly represent the government (sometimes members of the government) and token representatives of special interest groups.
 
In good times the banks will break down your door to lend you money for almost any endeavour. That is the nature of their business. However, in the cyclical bad times, they will break down your door to collect their money. Good times are their fault; bad times are yours. Beware the lender who ever tries to lend you money. On the other hand, to be able to obtain a loan, you must convince the lender that you really do not need it: your assets are tied up at the moment in other ventures or uses.
 
Banks earn excellent profits due to their monopoly. Loans to big business are often made without the comparative security demanded and obtained from small business. Often they plead that they were forced by indirect government pressure to make bad loans at extremely low interest rates to various domestic and foreign businesses and governments, many of which end up as relatively unsecured losses. Canadian small business pays the price: they do not have any political clout. The Canadian banking business has been built on the backs of small Canadian business and savers.
 
On the other hand, the system is quite safe, given world standards, and they have done what they were intended to do. In due course, as less government intervention takes place in our society, the present system will be dramatically changed due to competition.
 
Banks pay exorbitant taxes on their exorbitant profits. They are in a catch 22 dilemma: to earn a certain rate of return for their shareholders, they must have a certain profit after taxes. The more the profit, the more the taxes. The government investigates the banks (making party legal hacks rich) and does nothing. Because of the monopoly they can adjust their charges to customers. Is it any wonder that the annual profits of each are relatively similar? There is as much competition from bank to bank as there is from gas station to gas station. But that also is another story about government regulation and intervention. So are marketing boards.
 
To sum up, don't do business with a bank unless you must. Dealing with them is like playing the slot machines: lots of fun but a guaranteed loss if you hang around long enough.