5 Ways For Your Business To Have Good Credit

Often, as a commercial lender, I have companies inquire as to how they can make their organization credit worthy.  Many times lenders struggle getting financing approved due to the lack of some key required information.  I would like to take this opportunity to go over some basic information that may help your company secure financing.  Also note, much of the information I request is also very useful information for yourselves and the management of your company.

   1.  Updated Information

The most important step is keep up to date financial information.  Most lending institutions require at least annual financial statements.  This will include the minimum of an Income/Expense Report and a Balance Sheet.  This reporting provides a snap shot of your business year to date and needs to be completed within 90 to 120 days of your company’s yearend.  Completion of the same will also result in reporting to CRA (Canada Revenue Agencies) as required and is typically completed by your accounting firm.

What New Mortgage Rules Mean

CMHC Mortgage Insurance Rules Changes

Effective Monday, July 9, 2012, the Canadian Mortgage and Housing Corporation (CMHC) only provides mortgage insurance for loans with an amortization of 25 years or less when the borrowed amount is 80% or more of the property value.  Canadian law requires insurance on mortgages that exceed 80% of a property's value.

Amortization - This lowers the amortization limit from the 30 year maximum set out in 2011.  It was as high as a 40 year amortization in 2006, but the amortization period has been lowered by the federal government over the past several years in an effort to encourage consumers to pay off debts more quickly.

Debt Ratios - The government has also set the maximum gross debt service (GDS) ratio at 35% and the maximum total debt service (TDS)  ratio at 42% in order to qualify for CMHC insurance if you have a beacon score of less 680.  The ratios are at a GDS of 39% and TDS of 44% if the beacon score is over 680.  We calculate the GDS by adding up mortgage payments, property taxes and heat costs, and dividing by the borrower's income. TDS adds in other debt payments such as lines of credit and credit cards to get total debt payments.

Life With Low Rates

An opinion piece by Jerry

With the Federal Reserve in the U.S. announcing that rates will be kept low until into 2013, Canada's own government bond rates have dropped and will most likely stay relatively low for the next year and half as well.

What does this mean?  With an almost guarantee of low rates for the next few years this will mean something very different to 2 groups - the savers/investors and the borrowers.

Savers & Investors - Low rates mean low returns on the safest investments.  This means bonds, GICs and term deposits.  With so many baby boomers looking at retirement over the next dozen years (or much sooner) they want a good return to build up their retirement fund.  The reality is that returns will be low, unless they go into riskier investments like mutual funds and stock markets.  However, principal and returns are not guaranteed with mutual funds and stocks, so investors need to be careful how much of their portfolio they put into the riskier investments while hoping for higher returns.

Rates Are Going To Rise

Rates have been at historic lows for about 2 years in Canada, and about 3 years in the United States.  As the international and national economies improve, interest rates really have nowhere to go but up, and that is going to impact you.

There are 2 groups of consumers who will be most concerned with increasing rates: Investors/Savers and borrowers.  The first wants rates to increase, the latter does not.

Debt Is Way Too Easy?

"Don't Pay for 14 months!!  No Money Down!"

My kids can practically quote some of the TV commercials that have pitch men shouting slogans about how cheap everything is and that you should get it now.  Especially the vehicle and furniture retailers.  Those ads are on all the time.  I have to turn down the volume just so I can think. Maybe that's a part of their advertising gimmick, making only their sales slogan stick in your head and erase all the other ads.  Who knows?  I think it might work on my kids.  To them, getting the item is far more important than thinking of how you might pay for it.  They would be quite happy to borrow money for every little thing that comes up on TV.

Debt itself is not a bad thing.  In fact it can help us purchase things that just cost too much to realistically have saved for before we buy: ie. a house, vehicle, or education.  So for those things most of us have to borrow money, and it's worth it to have a mortgage so we can have a house..  But there are things where borrowing money doesn't really make a lot of sense.

For instance, if you pay for a computer on credit card and make low monthly payments on your card, you will probably have to replace the computer before you have even paid it off.  That's probably not a good thing to borrow for and pay back over 7 years.

The smart people at Wealth Web Gurus have a very good article about "Good Debt vs. Bad Debt."  It describes how debt can help you and when it isn't good for you.

The Financial Post has an article about how easy it is to get into debt.  The author, Gary Marr, thinks it is a little too easy to get into debt.  "Debt Becomes Us."

Using debt wisely can help everyone over the course of their life.  Use it unwisely and you'll end up with a whole lot of letters and phone calls, maybe even some guy named Vinnie knocking on your door at midnight, asking for the keys to the car.  Nobody wants that.

My own advice about debt is:  If you have to borrow for it, the value of the item should last longer than the loan.
Jerry