It is often said, banks only lend money to people who don’t need it.
Even if it is very, very true, it also begs the question, “So if you don’t need any money, why are you down at the bank looking for a loan?”
Actually, there are many good reasons. One reason might come under the term “leverage.”
Why earn 10 per cent return say, on a business investment, if when you borrow two-thirds of the investment, you can pay back the loan, pay back interest on the loan, and have the original two-thirds available to invest in more projects? Or triple the size of your original idea!
If our arithmetic is correct, you can turn that 10 per cent return you figured you would get, with the magic of leverage, into 18.5 per cent on a bigger project. Or even 21.6 per cent on your original idea.
Another reason to borrow is to “keep up your good credit.”
These days, even not making a minimum payment on a credit card, no matter whether it came from Canadian Tire or Visa Rewards, is a huge mistake. But also making a mistake is not having any debt at all.
Credit agencies guard their secret formulae on how they rate you. But having a bit of debt and making regular payments is a good way to keep your rating alive and well. Remember, be scrupulous in making your payments. Never miss.
Once you make up your mind to be a great bank customer, off you go. And guess what?
As Canadians, we should be thankful for the health and quality of our financial system. But that has come at a price. Most business people, and even many home and vehicle owners know the feeling well. When you need help, it gets very expensive indeed to find it.
Chartered banks in Canada are protected from competition. Especially from those nasties south of our border. Is the protection needed? Good question. It sure helped during the financial collapse of 2008.
But just how badly is protection really needed? After all, Canadian banks have no problems buying and running banks in other countries. Especially in that bastion of free enterprise, the United States. How do they managed to compete there? Meanwhile, it is still hard for so many to do business with the banks in Canada?
So hard in fact, Canada has its own government lender for small business, the Business Development Bank. 100,000 small and medium enterprises do business with the BDC.
Say what you will about our governments, but they have backstopped $50 billion worth of loan business at BDC. Not shabby at all.
But in all this, small business as a group is still having a rough time. Despite the sector being responsible for 80 per cent of Canadian jobs, and more than 50 per cent of total economic output, small business is shrinking. Owners are old – two-thirds are over 50. Government of all levels gives great benefits, wages and pensions. Schools do not teach entrepreneurship. And big banks share of business loans has shrunk to about 11 per cent, the lowest share in the 38 country Organization for Economic Development.
We really need to do much better in many ways.
Jeff Burgar
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