After almost three years of recession, things were really looking up for Canadian companies. By mid-2011, business confidence was on the rise, employment had been given a shot in the arm, and commercial lenders were starting to loosen their purse strings.
Accordingly, the small business sector—one of the economy's top contributors—anticipated easier access to credit, as evidenced by the responses to a survey conducted by the Canadian Financial Executives Research Foundation in early 2011. 77% of senior financial executives in the small business category said they expected credit to be available or very available by September 2011. Small public companies (50%) and small private companies (49%) also said that credit came at a higher cost, while significantly fewer large public (23%) and large private (32%) companies said credit was costly.
However, despite these positive developments, there were still nagging doubts, particularly around high material and fuel prices, the soaring loonie, and consumer debt. And added to that was the U.S. debt-ceiling crisis and renewed uncertainty about European sovereign debt. Now well into 2012, these continue to cause concern.
With all this uncertainty, the question on many lips is: Will the background fears about the health of our economy, coupled with ongoing market volatility, be enough to derail our economic recovery? Or—more importantly, in local terms—what does this mean for Canadian companies in terms of their ability to access capital, and ultimately, for their role in guiding Canada back to financial health?
As a market-watcher and lending professional, I believe that this volatility does not signal the beginning of another recession; nor that it means credit will dry up. The recession that began in 2008 was, arguably, sparked by reckless lending practices, particularly those south of the border. Since that time, Canadian capital providers have received much positive attention for their prudence, consistency, and liquidity. According to data recently compiled by Bloomberg, five of Canada's Big Six banks have now made it into the world's top 20 strongest banks, outperforming any other country. So, it is unlikely that money will stop flowing, but continued market uncertaintly will likely mean status quo of due caution from capital providers.
How does lender vigilance affect companies seeking to borrow? Based on what we saw in credit markets in 2008 and 2009, caution affects the top-tier corporate markets differently than those in the small- and medium-sized enterprise market.
For top-tier corporate clients seeking to borrow, increased caution on the part of capital providers can be a net benefit. As more and more capital suppliers compete for the business of a finite pool of AAA-quality companies, those companies will enjoy better pricing and terms.
Smaller and mid-market companies—and those not AAA-rated—may experience difficulties in obtaining credit. Loan values may shrink, interest rates (and fees) could increase, additional terms and conditions might be imposed, and due diligence could become more rigorous.
However, it's not all grey skies for smaller businesses. And there are a number of things you can do to ensure you effectively articulate your company’s financing needs at a time when the increased caution of lenders becomes more the normal practice.
- Ask for the right thing from the right source. Be sure to understand the range of financial products out there and who the best providers are given your company's industry, stage, and size. It’s critical that you meet your financing need with an appropriate loan.
- Ensure your company tailors its "ask"—and supporting due diligence information—to each specific capital provider.
- Treat your lenders and investors as partners. Cultivate a strong working relationship based on a mentality of partnership and full disclosure.
Learn more about First West Capital
Kristi Miller, MBA, is a vice-president with First West Capital, a provider of subordinated debt and mezzanine financing. She has over 15 years of financial industry experience, including 11 years in the subordinated debt market. Miller has developed and taught a number of courses for the ICABC, including Lenders, Banking & Your Client: What You Need to Know, and was on the organizing committee for the ICABC's Financing Symposium. Her article “Recent Market Volatility, How Will It Impact Canadian Companies' Access to Capital?” first appeared on the Chartered Accountant of British Columbia’s website in October 2011.