Archive for April 2011
Federal Election Weighin
April 28th, 2011
“Election Results Could Have A Dramatic Impact on Interest Rates”
For the most part I try to keep my comments to strictly financial and financing topics and I will today, sort of, although I plan to go on a bit of tangent.
Even thought the dollar is 5 points above parity today, it should actually be higher right now as the U.S. currency continues to depreciate against all other major currencies at a faster rate.
Why should the Loonie be even higher?
Because the potential outcome of the May 2, 2011 federal election is making the rest of the world nervous, present company included.
Anything less than a conservative majority will likely have some negative impact on the dollar and will also increase the bank of Canada’s intervention with monetary policy to offset the expected increase in fiscal spending if any type of alliance forms among the NDP, Liberals, and Bloc.
Here’s some additional information on the topic as well http://business.financialpost.com/2011/04/28/ndp-gains-might-sink-loonie-or-not/
When we are talking about monetary policy, the only real lever the bank of Canada has is interest rates, and they will be pulling it much harder if required to maintain the status of the currency.
The result will be higher than expected business financing rates.
Any scenario where the NDP would come into power would as the article I’ve linked to states …”could cause the dollar to Wobble”.
The NDP had some well documented disasters trying to run the provincial governments of B.C. and Ontario, and to think they have the expertise available to manage the fiscal policies of the entire country is laughable.
I understand that everyone may not like how the conservatives go about their business and I don’t agree with all the things they do or say either.
But this is the only party capable right now of keeping us going in the right direction.
Hopefully people can see through all the pie in the sky promises that political parties make to try and get into power.
If not, and we get a Conservative minority, or heaven forbid, a NDP minority government, then we are turning the ship into the financial abyss that most of the rest of the world is in right now.
Selecting governance should not be a popularity contest where the unqualified get to be contestants.
Canada is currently held up as one of the strongest economies in the world, period.
Let’s not do anything next week that is going to jeopardize that status, regardless of what you think about Mr. Harper and some of his soldiers.
I’m all for change … if there is a better option. But there’s not.
We can continue to stay ahead of the financial cloud of dust darkening most countries these days, or we can fall back into it like everyone else.
It is a choice and now is the time to pick the party that has the best chance to keep the country on a solid economic track.
Vote Conservative.
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Business FinancingMore On Canadian Inflation
April 19th, 2011
“March Inflation Reports Show Inflation On The Rise Across The Country”
The March inflation numbers out showing a month to month increase in inflation for every province and territory.
Here’s all the specific statistics broken down by region http://www.theglobeandmail.com/report-on-business/inflation-across-the-country/article1990894/?utm_medium=Feeds%3A%20RSS%2FAtom&utm_source=Report%20On%20Business&utm_content=1990894
Time to break out Chicken Little…the sky is falling. Or to the bank of Canada Governor, inflation is getting away on us, time to slam on the breaks and increase interest rates to slow the economy down.
Or not.
As I recall from economics class, there is real and perceived inflation. Real inflation occurs when the available economic capacity of a country starts to deplete, causing pricing pressure on the available resources.
Perceived inflation is when people think inflation is present or think its rising, so they start increasing their prices to allow for what they perceive to be in effect, whether it is or not.
If there is too much continuous talk about inflation being on the rise, then perceived inflation effectively becomes real inflation as people’s actions cause it to happen.
I’m not saying this completely the case right now, but with all the press being directed towards inflation and interest rates these days, perceived inflation is definitely contributing to the rise in inflation to some degree.
The combination of real and perceived inflation would appear to be reaching critical mass in terms of something having to be done about it.
As more and more information is reported on the subject, the more inflation is likely to increase.
If someone wanted the interest rate to move in one direction or another and could control or significantly influence public opinion on the subject, they could potentially create the interest move they were looking for.
More likely this can happen on a follow the herd mentality where the topic gets enough short term press at the right time where everyone jumps on the bandwagon and causes their collective inflationary fears to come true through their actions.
Regardless of how you choose to look at it, it appears that interest rates are likely going to start moving upwards very shortly, potentially as early as May.
Hopefully the make up of the actual inflation is more real than perceived so that the corrective actions likely to be taken are appropriate and produce the desired result with the least amount of suppression to economic growth.
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Business FinancingInterest Rates Rising?
April 14th, 2011
“What’s The Latest And Greatest On Canadian Interest Rates?”
I came across a number of articles today on Canadian interest rates and projections for where they are going and like usual, the prognosticators are all over the map.
But this time at least, I believe its for good reason.
The governor of the Bank of Canada uses interest rates like a gas peddle to manage inflation in the economy. Inflation becomes an issue with the actual production capacity of the country starts to reach the production potential. As production potential is reached, inflation can start to build quickly.
Over the last 6 months, Canada has seen a higher than expected level of growth, narrowing the gap between actual and potential production capacity with experts now saying that capacity could be hit in 2012.
Because it can take a while for the brakes to come on with interest rate moves, it would seem that larger interest rate increases are coming and may need to happen more often which will directly impact your business financing plans going forward.
But then, there’s the other side of the coin.
The recent spike in the value of the Loonie against USD is likely going to slow down economic growth as exports start getting too pricing. And if the Loonie stays above the U.S. dollar for an extended period of time, the economy could very well slow down on its own.
And if you prematurely increase the interest rates, the Loonie could go even higher has holders will be getting a higher return for their money creating increased demand.
For more background on this topic, here is pretty good article you can refer to… http://www.theglobeandmail.com/report-on-business/economy/loonie-could-slow-growth-for-years-bank-of-canada-warns-in-report/article1983484/?utm_medium=Feeds%3A%20RSS%2FAtom&utm_source=Report%20On%20Business&utm_content=1983484
So with all that being said, what is going to happen?
If you leave interest rate increases too long, there may not be enough time to react and you run into inflationary impacts.
If you increase interest rates too soon you could help stall out the economy due to the likelihood that the Loonie is going to stay at a high level for a while, potentially even years.
Because of where we are at right now, its almost a given that interest rates are going up. Inflation can become a run away train that creates the next recession sooner than later, and the Bank of Canada is going to do everything in its power to not let that happen
The questions that remain are how much and how often?
Right now, the experts are calling for modest increases in July.
That could hold.
But an increase could also be sooner and higher than expected as well.
Your guess is as good as anyone’s at this point.
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Business FinancingOther Sources Of Business Financing
April 11th, 2011
I wrote last week about the fact that over 50% of all business financing does not come from banks in direct contradiction to popular belief.
Business financing has more to do with the creativity and ingenuity of the entrepreneur and business owner seeking out sources of financing that can get value above and beyond an interest rate on a loan.
And guess what?
Banks also fall into this category.
There is virtually no bank or lending institution out there that wants to just make loans to you. Their objective in giving you a loan is to help maintain the investments, insurance, and services they have with you which tend to be far more lucrative than any potential loan profits.
But by saying that business financing comes from non bank sources, I’m continually asked for more examples of this.
Here’s an article the talks about one additional source of capital for business which has been coined “crowd funding”. http://www.theglobeandmail.com/report-on-business/your-business/start/financing/need-financing-join-the-crowd/article1974748/&/
Crowd funding is an off shoot of the social network movement where entrepreneurs and business owners can ask for “donations” to fund a very specific project outline.
All proceeds provided to the business are done through donation to stay within the requirements for investing governed by the securities and exchange commissions in different geographies.
In order to entice donations, an applicant for funding can provide other non monetary rewards such as fresh baking, acknowlegement of contribution on a product, etc.
The donation amounts can range from a couple of dollars to hundreds and thousands of dollars.
The growing success of this type of funding method has a lot to do with the donator getting hooked on the business owner’s story and wanting to be a part of it.
All that being said, there are also those in crowd funding that do want a monetary return.
For these individuals, territory licensing agreements are just one example of what they are receiving for the money they may put in.
While this is not likely going to be able to raise $100,000’s of dollar for a project, in many cases people are looking for $5,000 to $50,000 which can’t be secured from any type of bank financing option.
I’ll pass more real world examples of non bank funding as I come across them.
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Business FinancingBusiness Loans From Peer To Peer Networks
April 8th, 2011
As I’ve mentioned several times in the past, only a fraction of the capital that is provided to small and medium sized businesses actually comes from banks and other institutional lenders.
Depending on who’s numbers you want to believe, I personally peg the amount somewhere around 40%.
So where does the rest of the money come from?
Boutique lenders, angels, venture capital groups, joint ventures, licensing agreements, and so on.
One of the sources that is getting some press these days are peer to peer lenders where businesses with case are basically providing loans to other businesses that qualify under certain criteria.
Here’s an article that goes into more detail of peer to peer networks in the U.S.
For me, this type of lending makes a great deal of sense for a number of reasons of which I’ll name a few.
First, if you’re a business with excesss cash and nothing internally to invest it in, what are you going to do with it?
Why not put your cash into businesses that are in your industry or a similar industry whereby you know how to qualify their business plans and monitor their performance and manage your risk?
If the loan goes bad, perhaps you’ve just acquired some assets that are very useful to yourself for pennies on the dollar, or you end up taking on partner that can add greater value to you in the long run.
There’s lots of other potential reasons for being a peer lender, but I’ll leave the rest for another day.
Business financing should always be about creating economic value from capital being utilized, regardless of the purpose. Period
As a business owner seeking capital, the more valuable your intended economic benefits are to more people with money, the sooner you’re going to find the capital you’re looking for
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Business FinancingBMO Getting More Serious About Business Financing
April 6th, 2011
A market wire news release came out this week about BMO’s 2010 business financing lending.
Here is an excerpt from the article…
BMO Study Finds 80 per cent of Small Business Owners in Ontario Consider Access to Credit as an Important Determinant Choosing Their Bank
BMO to Add 150 New Small Business Banking Experts Across Canada in 2011.
….
Here’s a link to the full article …http://www.marketwire.com/press-release/BMO-Small-Business-Lending-in-Ontario-Reached-More-Than-11-Billion-in-2010-TSX-BMO-1423285.htm
The first point is more than a bit obvious. I don’t need a survey to tell me that at least 80% of small business owners may want access to credit at some point from their bank.
The second point is more interesting and telling.
During the recession, the major banks and other institutional lenders were laying people off and coming up with new and creative ways to decline requests for business financing.
Now BMO is telling us about all the money they lent out last year, survey results that speak to businesses looking for capital, and an announcement that they are going to hire a bunch of new people to work on business financing requests.
I’d say this is definitely a strong signal that the business lending market is getting back to what we may consider more normal operations in the Canadian market.
That being said, I still believe that the major lenders’ credit policies are going to still be tighter than they were a couple of years ago, but at least they are actually getting back to lending money.
Business FinancingCanadian Economic Growth On Track
April 5th, 2011
Despite the high dollar, earthquakes in Japan, and general instability in the global financial markets, the Canadian economy is chugging right along and even slightly exceeding its growth targets so far in 2011.
This RTT News wire provides more of the statistical facts for those that are interested… http://www.rttnews.com/Content/AllEconomicNews.aspx?Id=1588120&SM=1
The challenge with growth is are you growing at the right speed to keep inflation in check and interest rates from rising.
And while the Bank Of Canada governor Mark Carney has mentioned that there is still considerable lack in the economy, capacity is being used up slightly faster than projected.
So for now, its likely that business financing interest rates aren’t going anywhere in Canada.
But that could change in the second half of 2011, especially if the economy stays on its current growth pace.
This is in keeping with what we have been hearing now for the last several months.
With commercial lenders loosening up the purse strings to some degree these days, now is a good time to be locking in the current rates if you have any fixed interest term lending facilities.
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Business FinancingMega Loans A Sign That Commercial Lenders Are Loosening Up
April 4th, 2011
The first quarter of 2011 has been highilighted by some larger commercial financing deals in both Canada and the U.S.
And while lending levels have not completely returned to the pre-recession period, things have greatly improved over the most recent months.
To further make the point, here is an article from the CTV news that talks about mega loans being used for financing takeovers.
http://www.ctv.ca/generic/generated/static/business/article1969220.html
This draws us to a couple of interesting observations.
First, the article talks about how commercial lenders have been getting more aggressive in providing short term bridge loans for acquisition and take over targets. This type of business financing is put into place to close the deal and by time until the long term funding can be arranged. But there is lots that can go wrong in the interim which could delay or even prevent the long term take out from happening, so in and of itself, this is a farily risky form of business financing.
That being said, business financing sources are making these types of deals, speaking to their comfort level in where the economy is at and their need to get back in the game to a larger extent to increase their profits.
These type of mega short term loans are also potentially a major boost to the economy in a number of other ways. The nature of a recession is that there is going to be industry consolidation and restructuring. But this can’t happen if there isn’t any money available to finance consolidating type activities.
As commercial financing starts to flow more freely, more of the ineffeciency in the market is going to get cleaned up faster and move towards positive production and job creation.
And even though we are talking about mega loans here, this does likely have a trickle down effect to small and medium sized businesses whom have had a hard time securing reasonably priced capital during the last two years.
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Business Financing