Ten on the 10th: interest rate Q&A with Chris Boissevain of Business Development Bank of Canada
10 on the Tenth, CITIFIED.CA
Published November 10, 2018
Citified's Ten on the 10th is a monthly question-and-answer segment connecting our readers with the insight and knowledge of Victoria's top real-estate and business professionals.
November's Ten on the 10th features Chris Boissevain, Manager at the Business Development Bank of Canada's Victoria office. As a Crown Corporation tasked with lending and advisory services to Canadian businesses and institutions, Chris has valuable insight into the nation's lending environment and its impacts on both consumers and entrepreneurs.
Asking the questions is Ross Marshall, Vice President of the Victoria offices of commercial real-estate brokerage CBRE. As a leader in facilitating large-scale commercial real-estate transactions throughout the Capital Region – which include apartment complexes, industrial retail and office properties, and land/development opportunities – Ross and his team are at the forefront of market-leading real-estate transactions on Vancouver Island.
Would you like to be featured as part of a future Ten on the 10th Q&A? We'd love to hear from you.
Some people might not be familiar with Business Development Bank of Canada (BDC), can you give a brief description of the organization?
BDC is a financially sustainable Crown Corporation that operates at arm’s length from our shareholder, the Government of Canada. We help create and develop strong Canadian businesses through financing, capital and advisory services. Our focus tends to be on Small and Medium Enterprises (SME’s). On the money side, our offer ranges from term loans to subordinated financing to venture capital as well as syndicated financing and securitization. Our advisory services provides practical and objective advice to help growing businesses address a wide range of challenges and opportunities.
How is BDC different from other financial institutions?
While BDC has to be financially sustainable, our mandate is to have greater impact on more entrepreneurs, so it is not just about shareholder value. From a lending perspective, we do this by tailoring financing solutions that fit a client’s particular need. In most cases we will take more risk than other institutions and lend a higher percentage of asset values. In addition, we are the only financial institution that has an advisory services practice. We think this is crucial as often times an entrepreneur needs more than money to build their business.
Interest rates are a hot topic so let’s talk about interest rates and where they are likely headed.
From our perspective the Canadian economy is relatively strong, labour supply is tight, salaries are increasing and inflation is close the Bank of Canada's (BOC) target. We suspect that rates will continue to rise gradually over the next year or more, but as always the BOC will have to carefully watch how higher rates are impacting the economy, especially given high consumer debt.
What can entrepreneurs do to insulate themselves from higher rates?
- We see that most of our clients are still on floating or variable rate interest rate plans, so the obvious choice is to consider fixing your rate for a period of time. The yield curve (the difference between the floating rate, short term rates and longer term rates) is reasonably flat so while longer term rates are higher, they are not unreasonably higher – about 65 bps between our floating rate and our 5 year rate. So if you feel interest rates are likely to continue to increase now might be a good time to lock in. You pay a premium, but think of it as an insurance policy against future rate increases.
- The second thing an entrepreneur can do is to critically examine their business operations. Interest rates, like exchange rates are beyond our control. There are less hedging strategies available to small, and medium sized businesses than large businesses so it makes sense to focus on factors within your control – your operations. Questions to consider are: are you maximizing revenues; are you costing your product or services accurately and appropriately; are your operations as lean as they can be? It is important to remember that we have been and are still in a very low rate environment, historically speaking. You have to prepare for higher rates and should not make low rates or a favourable exchange rate the centerpiece of your competitive strategy, instead focus on understanding your customers and providing as much value as possible.
- The third thing is ensuring you have the right type of financing for your business. The issues to consider are your business’s cash flow and why do you require financing. With regard to cash flow, examine whether or not your business is subject to seasonality. If it is can you structure loan payments to match cash flow? Do you earn a higher rate of return on your working capital by retaining it for operations as opposed to using it as a source of financing? If so, is a loan that provides a higher loan-to-value ratio (higher percentage of financing) worth considering? Are you looking for financing for short or long term assets? Match the life of the asset with the term of the loan; do not use your line of credit to buy a long-lived fixed asset! Having the right type of financing will help you build and maintain a strong balance sheet.
Who is your ideal client?
It would be company that was owner managed or closely held, has both a focus on growth and opportunities for growth. Ideally, the entrepreneur is open to advice and sees the benefit in a long-term partnership.
Tell me more about your advisory services practice, what do you offer?
Our advisory practice is really about partnering with entrepreneurs build a stronger business. Many entrepreneurs are subject matter experts with regard to their product or service, but often could use help in other areas of their business. Generally, we focus on five practice areas: increasing sales; finding and evaluation new markets; improving operations, optimizing adoption and use of technology and building management capacity.
I still hear the phrase “lender of last resort” regarding BDC, is that accurate?
No, absolutely not! While it is true that at one time we were the lender of last resort, we have not been for over 23 years now. We complement the role played by private-sector financial institutions and offer an alternative source of capital. If you were to look at our portfolio, you would find that many of our clients are amongst the most successful local companies.
OK, talking about business operations, what are you seeing as the main challenge facing entrepreneurs right now?
The issue we are seeing, across industries, is lack of qualified, reliable employees. This seems to be the universal theme facing business right now and the aging demographics are making it worse.
What can entrepreneurs do about the tight labour market?
Wages are the first thing that comes to mind, but really there’s a number of things to consider. We often see that small or medium sized business do not focus on Human Resources, but simple things like having job descriptions, clearly defined roles and expectations, adequate training and a meaningful performance management system can contribute to employee engagement and retention. The other aspect to look at is the resources you are investing in operations and technology. Is it enough to make your employees as productive as possible? This is not about replacing humans with technology but rather optimizing all your human resources by investing in technology that allows them to be more productive so that you can continue to grow despite the labour shortage. As an example, BDC has equipped all of us with iPads that allow us to conduct far more productive meetings with clients and even in some cases we’re able to authorize a loan on the iPad at a client’s location.
Any final pieces of advice for entrepreneurs?
- Entrepreneurship can be a lonely road, cultivate relationships where you can discuss your business and get advice.
- Focus on improving aspects of your business that are within your control and try to mitigate external risks.
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