Financial Institutions & their Areas of Expertise

There are many types of financial institutions in the marketplace. One of the keys to competitiveness is to be able to differentiate which institution is best placed to satisfy your particular needs. In some cases, a key to finding the required funding, is knowing which financial insitution not to go to.

If you seek funds from a financial institution not familiar with the kind of borrowing or instrument involved, you may end up getting frustrated with financial institutions in general. For instance, banks are not in the business of providing high risk loans, but their venture capital subsidiaries are, as are other venture capital firms ( assuming you have the need for say, at least $250,000, and can demonstrate an excellent growth potential for your firm).

In order to help steer you in the right direction, we have segmented the financial institutions into six broad categories and include suggestions as to which segments would be able to help you with which products/needs. Obviously, you must keep in mind that with so many institutions offering so many products, there is no definitive word on just what the perfect match would be between your needs and a particular type of institution. Also, the fact that you are a SME service firm means that you may not have access to a particular type of funds, which in turn means that you may not have access to a certain type of institution. For instance, a SME management consulting firm with annual revenues of $150,000 would unlikely be able to obtain venture capital funds (because the firm does not have a tangible, high growth, commercially viable product) and consequently, the firm is unlikely to ever do business with a venture capital firm.

SMEs should keep in touch with lenders as product and service packages are changing rapidly and at some point, it might be to an SMEs advantage to change its "package".

Banks

The Canadian domestic banks rank right at the top of world banking organizations in terms of sophisticated systems, products, asset levels and professional management. They can offer, either directly or through their subsidiaries, just about any product you would want. It is in your best interest to develop some kind of a relationship with your local banker. As a SME, you probably would want to have one or more of the following facilities with your local banker (remember there are many branches, so shop around before you pick one): credit cards; current account; a line of credit for you and one for the company; with those lines of credit to include an overdraft facility; a term loan.

Credit unions and Caisse Populaires are also active in the commercial lending field and should not be overlooked as a source of funds. Many foreign banks also have offices in Canada, but generally speaking, they usually have higher minimum lending amounts. Unless you require higher amounts or are involved in import or export letters of credit transactions, you would be unlikely to use the services of a foreign bank. However, their services should be investigated rather than being rejected out of hand.

Trust companies

It is likely that the word "trust" stems from the original mandate of trust companies which we believe was to manage the funds "entrusted" to them by estates and other individuals and corporations not able to do so themselves because of rules dealing with conflicts of interest, or because of the desire to put the management of their funds in the hands of experts. Although this still forms a significant part of a trust company's mandate, the necessity to find outlets for these funds entrusted to them, has forced many trust companies to offer a line of products similar to the domestic banks. Thus you can also look to them for the same kinds of products that you would seek from a bank (see banks above).

Insurance companies

In addition to offering standard insurance products like home, auto, life, and disability insurance, insurance companies can also provide business-oriented products like business interruption insurance, credits insurance, coverage for errors and omissions, key-man insurance, as well as retirement and estate planning and personal financial planning including related investment and savings products like equity funds and fixed income funds. In terms of financing, some insurance companies will also provide mortgages. Your individual situation will dictate which products apply, but if you are the sole source of livelihood for your family, we suggest that it is crucial to obtain life and disability insurance.

Finance companies

There are different categories of finance companies, with the type depending generally on their particular mandates. There are personal finance companies which target individuals; commercial finance companies who target companies; equipment finance companies who specialize in providing term loans (or leases) for the acquisition of fixed assets; and leasing companies who provide funds indirectly by buying equipment and then leasing it to you. As a SME, it would likely be to your advantage to compare the terms and conditions offered by commercial/equipment finance/leasing companies to the terms and conditions offered by your bank or trust company. You may find the terms to be more flexible, although the rates may be higher.

Government agencies

Many SMEs in the service business would unlikely be eligible for significant funding by banks and other usual sources. This could be due to the intangible nature of the service they provide, and/or the inability to put up solid security in support of the amount advanced, and/or the relatively insignificant amount of funds required to run their business. We have earlier provided an extensive list and description of some of the government facilities available to SMEs.

Venture capital firms

Venture capital firms provide equity funds in return for part-ownership of the company. They do so in anticipation of selling those shares at a large profit when the company goes public (that is, when the company issues shares to the public at large), generally within five years. In hazarding a guess, one might estimate that a venture capitalist would turn down 90 % or more of all applications received. Those accepted would likely be hi-tech growth companies in need of significant capital. Chances are slim that a service SME would fall into that category and consequently, it would have to rely on other sources of equity funds, such as those described earlier. However, it is not inconceivable that some funds would be available. The best place to start looking would be the financial products offered by the BDC (Venture Capital or its Venture Loans program)