As business owners focus on short- and medium-term cash flow, the long-term can slip into the background sometimes. Owning appreciate assets, such as real estate, can make considerable difference to a business' long-term strategy to improve cashflow.
The Bank of Canada expects the economy to rebound in the second quarter of 2021. This first quarter, because of the shutdown, will be a difficult time for businesses. The Bank of Canada stated in its January report that the economy will shrink. However, as Covid-19 restrictions ease and the vaccine rollout continue, the economy will strengthen and grow 4% this year and by 5% in 2022.
As more people are vaccinated, pandemic-related uncertainty will decline and business confidence will increase; business investments will increase. The Bank of Canada expects stronger business investment this year than it had previously expected, in its October 2020 report. According to the Bank’s January 2021 Monetary Policy Report, as pandemic related certainty declines and business confidence improves, the projection for business investment has improved. The Bank also expects ‘less scarring effects on businesses and workers’.
Importantly, The Bank of Canada’s target overnight benchmark rate remains unchanged at 0.25%. Borrowing costs will continue to stay low. Business owners thinking about the long-term cash flow of their business should take advantage of these low rates, which are likely to remain unchanged for some time to come. The way to do this is through ownership of appreciative assets.
Real Estate: The appreciative asset that helps cash flow
Owning real estate is still considered by far the most important investment an individual, or a business can make. This is particularly true for business owners who are thinking about cash flow not only for the short- and medium-term but also for the long-term. According to the businesses surveyed in the Bank of Canada’s Business Outlook Survey - Winter 2020-21, stronger hiring and investment is planned for 2021.
Business owners planning on investing in their businesses should consider investing in commercial property. Doing so would mean multiple benefits for the business:
- The money that you would otherwise spend on rent would instead contribute usefully towards the principal cost of the property
- You will be accruing equity, which you won’t be doing if you’re renting. With the down payment plus each monthly payment, you build equity in the property. In this way, the property’s market value and the loan balance will contribute to the overall value of your business
- Ownership means that you will benefit from any increase in the value of the property. This will grow your asset base and it will also make your balance sheet look stronger. This will be important if you need to take a loan -a strong balance sheet bolsters how stable your business looks
- You will be able to project your costs for years to come due to the advantage of a fixed rate mortgage. You will have set repayments, and will not be at the mercy of a landlord who could increase rent
- Once the mortgage has been paid, your business will have acquired a significant asset. The property can then be sold for a profit
- You can use the property as a source of extra income. While commercial spaces are currently vacant, if you buy a larger space, you can rent out the space and in time use it for business development, giving your business room to grow and expand
- You may be eligible for tax savings. Depending on several factors, such as how long you have been in business, the profitability of the business, and the portion of the purchase price that relates to the land, rather than to the building, a property purchase could reduce your tax bill
Therefore, investing in real estate can be a significant contributor to the long-term cash flow of a business, and is a great asset building strategy.
To buy or not to buy, that is the question
How well your business has fared during the pandemic will determine if investing in commercial property is the right move for you.
The number of businesses that will face cash flow issues will increase the longer the pandemic lasts. This is especially true for sectors that have been hit hard by Covid-19 and the resulting government restrictions. The Canadian Federation of Independent Businesses expects more than 160,000 businesses to close before the pandemic ends. Many of these businesses are buckling under the weight of restrictions, the January 2021 lockdown being an additional burden, along with increasing amounts of debt. If your business is in a sector that was hard hit by the pandemic and is struggling with debt, you should consider ways to consolidate your debt and increase cashflow in the short- and medium-term.
However, businesses in sectors that have been less affected by the pandemic have increased their cash buffers. If your business is in one of these sectors, now is the time to start considering investing in real estate. Take advantage of the low borrowing costs. The Bank of Canada has held the overnight interest rate at 0.25%, the lowest it has ever been. Equally important is that the Bank is expected to continue to keep borrowing costs low until 2023 (which is by when the Bank predicts that the inflation target will have been achieved).
GreenFlow Financial has been assisting business owners to implement strategies that increase cash flow and secure commercial mortgages in an economically feasible and time efficient manner for many years. We use mortgages, in conjunction with other financial products, to create the building blocks that assist business owners to attain their financial goals.
This is the third article in a series of articles for business owners. The articles explore ways businesses can increase cash flow. The first article is about how business owners can consolidate their debt. The second article explores 3 ways businesses can increase cash flow.