≡ Menu

Is The iPad Useful For Business?

iPadI’ve had an iPad for over a month now and I thought it would be helpful to relay my experience with it so that other business people can judge whether it would be useful in their workday. I tend to be an early adopter of technology and all things Apple, so I ordered the 64GB 3G version of the iPad as soon as it became available in Canada.

The iPad is an excellent content consumption device. I love surfing the internet and checking my mail with it. The experience is every bit as good as on my Mac. I don’t write a lot of email on it, but when I do, the larger keyboard makes it much easier to type than on the iPhone.

I have Twitterific for keeping track of my twitter accounts and I have to say that this is a far superior experience to any twitter client for the Mac. There is something to be said for scrolling through a list of tweets and touching the links to bring up a webpage, which can then be sent directly to Instapaper. Instapaper is a wonderful free service that I use for storing content that I plan on reading later.

Video and audio, as you would expect, are excellent on the iPad. The lack of Flash support is certainly an issue, especially with many smaller websites that haven’t converted over to HTML5. This can certainly be annoying but it isn’t a deal breaker.

Books are a good experience on the iPad. There are three stores to choose from; Apple’s iBooks, Amazon’s Kindle, and Chapter’s Kobo. I’ve purchased books from all three stores and the prices in the iBooks store tend to be noticeably more expensive than in the other two stores. The Kindle store has the best selection of books but some newer titles are only available on Kindle in the United States, which is frustrating. The user interface, dictionary and the ability to store and read PDF files sets the iBooks reader apart but the other two are acceptable. I think the e-ink screens of the Kindle and the Kobo Reader would be better for a day long session of reading but I’ve read entire books on the iPad without getting a headache from eye strain.

Content creation on the iPad is a bit of a mixed bag. I’m writing this blog post on the Pages application with Apple’s bluetooth keyboard. It’s a bit of an odd experience without a mouse but I think over time I’ll get used to touching the screen to move around a document. All of the iWork applications are useful but they are not the same as their Mac counterparts. I tried editing a large Pages document we are working on and all of the formatting got messed up because the iPad version of Pages didn’t support some the things we had implemented in the document. I think the iWork applications will be good for starting projects that will then be finished on the Mac or creating documents in a crunch but they are not powerful enough for my needs. For this reason, I think I’ll still have to take a Macbook on long business trips.

I think the iPad can be a useful addition for the business owner. It won’t replace a laptop but it fills the space between the laptop and smart phone very nicely. The current offering of software for the device is still pretty meagre but I think once more specialized software gets developed the use case for the iPad will only get stronger.

If you have any questions, please feel free to ask them in the comments section or in the question box in the sidebar.


How to Win When the Game Isn’t Fair

Imagine yourself a major league general manager. Now consider this: your top three players from last year have left the team for free agency because you cannot afford to match competing offers. Your owner wants to run the team like a business and set the payroll at $40 million (the three free agents that left signed for a total of $33 million). The Yankees payroll is $126 million. What do you do? Give up? This is the scenario that Billy Beane faced in 2002. In his best-selling book, Moneyball, Michael Lewis got to the bottom of how Beane got his Oakland Athletics to not only hold their own, but to beat teams with vastly higher budgets. There are many lessons applicable to business and success in general from this book.

Billy Beane
Billy Beane grew up a naturally gifted athlete. His abilities in any sport he tried plus his physique caught the eye of professional and college organizations alike. After a few workouts, Stanford offered him a joint baseball/football scholarship. He was to replace John Elway as Stanford’s quarterback even though he didn’t play since his sophomore year in high school. He was in the same draft year as Darryl Strawberry and was widely considered the better athlete. He was drafted by the Mets and started his professional career. However, his natural ability and physical talent didn’t translate into success.

Billy Beane in the Mets organization with future protege J.P. Ricciardi.

His biggest problem was his inability to deal with failure. After he struck out, he was famous for destroying the dugout and clubhouse with his outbursts. This led to a number of stops in the minors and he never came close to fulfilling his potential. After his pro career, he was left with a strong impression on how not to recruit a major league ball player.

Blue Ribbon Panel
As free agency and no spending limits on players took hold in the late 1990’s, a number of major league owners felt that they weren’t able to compete with the big spenders. In addition, if something wasn’t done to even the playing field, the poor teams would fold and the entire league could be in jeopardy. Bud Selig, the Commissioner as well as the owner of the Milwaukee Brewers, headed this panel. The problem for the panel was if the situation was so dire, how could they explain the success of Oakland? Selig’s response was Oakland was an “aberration.”

How Beane Did It
Baseball is unique in that it lends itself to statistics and statistical analysis. Beane hired Paul DePodesta, a Harvard grad who never played baseball. DePodesta brought the insight from this statistical analysis, and was not swayed by subjective opinions of the scouts.
In order to succeed in the unfair competition of Major League Baseball, they had to look at the game in a new way. They thought of a baseball game as a process. On defense it was getting outs as quickly as possible. On offense it was preventing outs and extending innings as long as possible. It also meant that individual achievements were secondary to team goals. Beane’s teams ended up playing differently than other teams. Stolen bases and bunts were almost unheard of because they weren’t worth the cost of the outs they caused. Athletics hitters were expected to take more pitches than other major leaguers because their hitting percentage went up with favourable counts and increasing pitch counts wore down the starting pitchers and got them to the less-talented relief pitchers sooner.

Jeremy Brown, a catcher that was on nobody's draft list, was selected by Oakland in the first round.

When something becomes expensive, it makes sense to scrutinize it to maximize value. In the case of baseball, certain player statistics were grossly overvalued in the marketplace and a few were undervalued. The undervalued statistics in hitting were on base percentage (OBP) and slugging percentage (SP). Beane and DePodesta found that they could draft and trade for players that ranked high in these statistics very cheaply because nobody else valued these measures. They also knew through market research that fans want to watch winning teams instead of stars on losing teams. Their business model then became to take nobodies with the right makeup, win with them, make them stars, and then trade them when they became too expensive to keep.

How Did They Do?
The following table sums up how they did in 2002.

Wins Losses Games Behind Payroll
Oakland 103 59 $41,942,665
Anaheim 99 63 4 $62,757,041
Seattle 93 69 10 $86,084,710
Texas 72 90 31 $106,915,18

This was in spite of baseball purists saying that they didn’t play the game properly. They didn’t “manufacture” runs by stealing bases and bunting.
They ended up losing the divisional playoffs to Minnesota in five games. This allowed these same purists to say “I told you so” and “Billy Ball doesn’t work in the playoffs.” Pure garbage. The reason why the playoff performance wasn’t as convincing as regular season is the small sample size of games to compare it to. Luck has a much bigger influence on a five-game series.
Since the publication of the book, Beane’s secrets aren’t secret anymore and the market has become more efficient. Bargains are harder to come by and the playing field has leveled.

What Can We Learn
Moneyball has taught lessons that are applicable in a wide range of endeavor. They are:

  • If you are outmanned and outgunned by your opposition, you need a different strategy to succeed. If you try to beat your competition with the same strategy, you are dead. The right strategy can overcome seemingly insurmountable obstacles.
  • Don’t be impressed by conventional wisdom. The Blue Ribbon Panel determined that Oakland had no chance of being successful under the current rules. How do you explain 103 wins on $42 million?
  • The outliers in data – the things that don’t fit the model often hold the key to breakthroughs.  Don’t ignore them or dismiss them as “aberrations.”
  • Breaking away from the pack and operating under your own strategy takes courage. Fear is a great motivator. If it doesn’t work, you will be embarrassed and out of a job. Beane overcame this uncertainty because his experience as a pro ball player convinced him that the established way of picking players doesn’t work. If you can overcome your fear and successfully execute, you can change the rules of the game.

What Is A Business Plan?

If you’re thinking of starting your own business, you might be doing some research online. Whether it’s in blogs like this one, forums or question and answer sites, they will all tell you to write a business plan. Unfortunately, that doesn’t do you much good if you don’t know what a business plan is. The definition of the term “business plan” might vary depending on who you ask. What I’ll try to do in this post is define the term business plan as we see it.

The Government of Canada’s Business Services For Entrepreneurs website defines it as:

“A business plan is a written document that describes your business, its objectives and strategies, the market you are targeting and the financial forecast for your business. It will assist in setting realistic and timely goals, help secure external funding, help measure your success, clarify operational requirements and establish reasonable financial forecasts. Preparing your plan will help you focus on how your new business will need to operate to give it the best chance for success.”

I’ve included their definition because I think is most accurately describes what a business plan is. However, I think it is important to acknowledge what the definition does not include.

Every business starts with an entrepreneur’s idea. Sometimes the idea breaks new ground and sometimes the idea is one that has been successfully done many times before. In order for an idea to become a business, the entrepreneur has to come up with a business model. An entrepreneur with a mainstream idea can copy the model of other successful businesses that are based on the same idea. With ground breaking ideas, this can be difficult because there may not be any appropriate models to copy. The entrepreneur will have to come up with the business model from scratch. The model will then have to be tested by conducting research and analysis through a feasibility study.

A business plan is not for idea generation, business model development, or studying feasibility. These steps should all be completed before the business plan is started. The business plan may have an impact on this previous work but its main goal is to describe how the business model will be implemented.

Some entrepreneurs come up with their idea and want to dive straight into the business plan before developing a business model or testing its feasibility. This can make for a document that is an incoherent mess because it is trying to be too many things. Presenting a document like this to bankers or investors can create problems because it makes the entrepreneur look unfocused and unsure.

A business plan should be written by the entrepreneur; either alone or with professional assistance. The plan belongs to the entrepreneur and should be used to guide implementation of the business. It should not be written for a banker or investor.

I like the quote: “No plan survives first contact with the enemy,” by Helmuth von Moltke (the Elder), a 19th century General Field Marshal in the German Army. This can be adapted to say, “No business plan survives first contact with the customer”. A business plan is not meant to be completed and put on a shelf. It is meant to be a living document that is revisited and adapted as conditions change. Many entrepreneurs make the mistake of not incorporating a feedback loop in the business planning process.

I hope this has clarified the concept of a business plan. I’ll look to elaborate on the entire journey from idea to business plan in future posts.


Cash Management Services

This post discusses an assortment of banking services that fall into a category loosely labeled “Cash Management”. These services are lessor known banking services that make it easier to make and receive payments.

Merchant terminals that take debit and credit cards are a must for many businesses. These terminals must be qualified for, much like a loan. The potential for fraud with a merchant terminal is very high so banks are very careful about who gets them. There are monthly fees of approximately $35 and transaction fees of $0.15 per debit transaction and 5% of each credit card transaction. These fees vary widely depending on transaction volumes and the type of equipment needed. Membership in certain trade organizations can lower the fees as some of these organizations negotiate group discounts.

Two types of credit cards are available for your business. The first type is very similar to a personal card but it is in the company’s name. You have to guarantee this card personally and it will show up on your personal credit report. Interest rates and annual fees are comparable to a premium personal card but loyalty programs such as Airmiles use a lower conversion rate. The approval process goes through the credit card company and your local bank doesn’t have much input.

A purchasing card is available for larger companies. A global limit for all cards is approved by the bank, much like a loan facility. The business can decide which employees get which limits. This card type allows an employee to hold a card without being personally liable for paying off the balance. This facility will have an application and annual fee. The interest rate might be slightly lower than the other card type but the balance must be paid off each month.

Many banks offer payroll services through a subsidiary. These services take care calculating deductions and submitting them to the government. The will pay your employees via electronic funds transfer (EFT). There is generally a flat fee for each payroll and a fee for every individual employee. This service can be valuable in that it cuts down on the administration of doing payroll and writing cheques. Operating account transactions are reduced because the service will use one transaction to take the funds for payroll which saves the transactions related to writing cheques to 10 employees, for example. It is also a benefit for employees as they don’t have to take time to deposit a cheque and they don’t have to worry about holds as all funds are deposited clear into the employee’s account.

Most financial institutions offer some sort of business banking website. The features on these websites vary widely but they are free. Many banks charge a premium for access to more advanced website features. It is possible to use these sites to submit payroll deductions and pay employees directly. This is a less convenient method than using a payroll service but it may be more economical.

These cash management services can vary widely in features and cost between the banks. It’s important to weigh these considerations against the convenience of having all of your services where your business accounts are located.


Seth Godin's Linchpin: a review

Have you read Seth Godin’s Linchpin yet? If not, you owe it to yourself to pick up a copy. In fact, this is the best business book I have ever read. It gets to the core of why some are failing and some are thriving. It gets to deeper meaning, like how to get more out of life by transforming what you do into your individual art.
The bargain is over
The bargain that Godin writes about is the deal between owners and labour: a worker trades a day of work for a day’s pay. Also implied is a worker’s loyalty and labour will be rewarded with job security and a living wage. This bargain is becoming more and more rare, as competition and obsolescence are preventing owners to keep their side of the bargain. So what is a worker to do?

What is a linchpin?
Along with owners and workers, Godin identifies a third type of person: the linchpin. In mechanics, a linchpin is a fastener that keeps other parts of a machine together. If the linchpin goes missing, the whole machine breaks down. Godin’s definition of a human linchpin is somebody who works outside of the established rules to achieve unexpected results. They exert emotional effort into their work and create new and innovative products and services. These innovations can be called art, and rightly so.

This is what you need to be.

Why are they so rare?
When we were young, creating art was something that came naturally. You’ve never seen a three year old with crayons and paper with writers block. You never see them ashamed of their art either. Something must happen to them by the time they enter the work force. Godin places the responsibility on how schools are run. He explains that today’s schools are geared to produce factory workers. It rewards punctuality, attendance, reading and following rules. Expressing oneself is usually barely tolerated or even punished. While this is good if all is required is to follow the rules, but what happens when something happens that isn’t covered in the rulebook? The machine falls apart. It isn’t fair to blame schools for the entirety of the problem. Godin states that the reason why this is so effective is how our brains are wired and calls the result the resistance.

The resistance
During human evolution, the brain has grown to be capable of great artistry and complex thought. However, the brain did not get rid of its lower functioning aspects. The limbic system is the lizard brain-the part of the brain that is shared with animals. This controls fear, anger, and lust – the functions that are designed to enhance survival of the species. While the limbic system is very useful in protecting us from immediate physical danger, it can get in the way of our art. Fear of failure, ridicule and separation from the pack are very powerful motivators and prevent people from really creating art from their work. Because this is so powerful, it is extremely difficult to overcome.

Be a linchpin
So the old guarantee of a secure job if you follow the rules is gone. What are you to do? You need to become indispensible to your employer or customers. How do you do this? Godin describes emotional effort and artistry as the keys. Emotional effort involves making a personal connection with the users of your effort. This is combined with putting all of your energy into creating a solution to their problems, whether they recognize them or not. When this effort hits the mark, the result is art, and everybody benefits.

Hire linchpins
One of my pet peeves about hiring is the over-dependence on credentials and experience. To me, employers are trying to manage their fear of hiring somebody unqualified. If they require a lot of certificates and experience, chances are, the successful candidate will have standardized approaches to work. The end result is a work force of rule followers unable to innovate. If you hire people with ideas on how to change your business for the better, you win. You might be challenged on your established practices, but how else are you going to achieve breakthrough results?

Get out of their way
Finally, it’s not enough to simply hire linchpins. If you strike down their ideas and punish them for working outside of the rules, two things will happen. You will lose your best employees. Linchpins will go where they can make their art and use their genius. The second result is worse. Other employees with innovative ideas will see how practicing art is punished and will hold back their best ideas out of fear. If you allow linchpins to do their thing, they can make other employees into linchpins. If these other employees see the rewards of emotional efforts, they have the possibility to overcome their fear.

I’ve only covered a small portion of the Godin’s message. Anybody looking to improve his or her organization or career should take the time to read this book. It is time well spent.


Understanding Equipment Financing

Equipment loans are used for financing a wide variety of equipment such as agricultural equipment, construction equipment, and even equipment working in a factory. This post will discuss equipment loans that fall outside of the Canadian Agricultural Loans Act (CALA) program or the Canada Small Business Financing Act (CSBFA).

Equipment loans have regular instalment payments matched to the business’s cash flow cycle. The repayment period (amortization) on the loan is matched to the economic life of the equipment being financed. These loans will take the equipment being financed as collateral. The bank will not lend the full amount of the purchase but rather 50% to 75% of the purchase price. The lending value is determined by the age and marketability of the equipment. The discounted lending value is meant to protect the bank against the inevitable depreciation of the equipment. The bank wants to make sure that the collateral is always worth more than the value of the loan.

These loans come with fixed or floating rates. Floating rates are based off of the prime lending rate with spreads of 1% or more, depending on the creditworthiness of your business. Fixed rates for equipment are generally higher than mortgage rates. Prepayment of a fixed rate equipment loan may not be allowed or may cause stiff prepayment penalties but this varies from bank to bank.

Dealer financing for equipment can generally be done at 100% of the purchase price. They do this because it is much easier for them to repossess equipment and sell it than it is for the bank, which does not operate a dealer network. Dealer rates may appear to be lower but watch for documentation fees or setup fees that can create an effective rate of interest that is close to that of your financial institution. A dealer may not give the same amount of a discount off of the purchase price for a deal they finance in house compared to a cash purchase. This also adds to the cost of borrowing.

Financing equipment can get complicated so I recommend that you shop around for your financing. Make sure you compare the total cost of borrowing of the various options that are available. Leasing equipment is another possibility. I’ll cover that in a future post.


We often get asked whether there are government grants available to start a small business. A recent story on the CBC National News profiled a B.C. entrepreneur who purchased a book sold by a private company that would supposedly contain all government grants available for his business. This $500 book contained inaccurate information and even descriptions of long discontinued programs. In short, the book was worthless.

The plain truth is that there are no “hidden” government grants. There is no need to pay anyone for a listing of grants available to business. A few hours of surfing government websites will give you all the information you need to know and best of all it’s free.

Generally, governments don’t provide grants for the typical small business. Grants are used by the government as a tool to encourage development in a particular industry or technology. This development has to be government supported because private companies consider the risk to be too high to undertake the investment themselves.

For example, Sustainable Development Technology Canada (SDTC) has the SD Tech fund that they use to fund pre-commercial green technologies. This is meant to fund a very specific niche of technology. The NRC Industrial Research Assistance Program has some funding available for companies that are engaged in science based research and development. While not a grant, Canada Revenue Agency has the Scientific Research and Experimental Development (SR&ED) Tax Incentive Program which provides tax credits for research and development.

There may be no grants available to start the average small business but that does not mean that there is no help available. Canada Government Services For Entrepreneurs is the best place to start. It’s a government website with links to many resources for small business. You can personalize the site for your home province and this will give you the location of the closest Business Infosource Centre. These Centres have a wealth of resources and people who will help you get you started.

The bottom line is that you need to have cash to invest in your startup. It may be possible to get a bank loan (see our post on CSBFA) but any banker is going to want you to have “skin in the game”. This means that you have a considerable amount of your own personal money at risk. Bankers have found over time that people who have a lot of their own money at risk work much harder to make a business a success than those who make no investment. People hate to walk away from something they’ve invested so much in. Private investors will view the situation much the same way.

Investigate and validate your idea, start planning your business, but make sure you save up money along the way to help get it started.


Delivering Happiness: A Review

Delivering HappinessWith a title like Delivering Happiness, you might think that this book contains enough fluff to supply a goose down pillow factory. Thankfully, Zappos CEO Tony Hsieh fills the book with interesting stories and important lessons.

The book is divided into three sections: “Profits”, “Profits & Passion”, and “Profits, Passion, and Purpose”. In “Profits”, Tony talks about growing up, going to college, getting his first job and starting LinkExchange. This might be my favourite section of the book because it gives the reader a good idea of who Tony Hsieh is and how he views the world. The word that comes to mind is “hustler,” not in the Three-card Monte sense but in the Gary Vaynerchuk sense of the word. A guy who is out there doing it, making things happen while others never get past dreaming, “What if?”  Tony talks about the businesses he had as a kid and how he took jobs to earn money during high school.

The “Profits” section talks about how Tony and his friend, Sanjay, started LinkExchange. He tells the story in enough detail that the reader can really get a good picture of what happened. Many entrepreneurs tend to gloss over the start of their companies in these types of books, which doesn’t do much for the kid in his dorm room, who is just getting started.

In “Profits and Passion”, Tony describes the early stages of Zappos, the company’s move from San Francisco to Las Vegas, and how the culture developed along the way. I was a bit surprised to learn that Zappos came close to death a couple of times. In many ways, the success of Zappos is much more impressive than Tony’s first success with LInkExchange.

Tony writes that Zappos competitive advantage comes from brand, culture, and the talent development pipeline. He feels that any other advantage that Zappos currently has, can and will be copied.

These three advantages were all put to test when Zappos decided to lay off 8% of its employees. For a high commitment culture like Zappos has, this could be the beginning of the end. They handled it in the best way possible and they don’t seem to have taken any long term damage. I think the most revealing statement regarding this time is when Tony writes that they made a mistake by over-hiring. Most other CEOs would write some nonsense about strategic realignment.

Amazon’s recent purchase of Zappos is covered along with the reasons why the management team decided to sell the company. Tony includes his emails to employees about the sale. These speak volumes about the culture of the company and Tony’s leadership.

The final section “Profits, Passion and Purpose” is where Tony ties the previous two sections to the title of the book. He theorizes that the things that truly make an individual happy, serve to make a successful company as well. When the individual’s goals are aligned with the company’s, great things can be achieved. He approaches this from a scientific point of view, referring to some of the recent academic study into happiness. They have applied these findings at Zappos with a great deal of success.

The book reads easily. Tony apologizes in the Preface for any mistakes in grammar because he didn’t use a ghost writer and he wanted the book to read like he speaks. This makes it like someone telling you a story rather than someone who is showing off that they own a thesaurus. The book is genuine in trying to get its message across. There are a couple of self-indulgent parts about poker and Red Bull but these are easily forgiven.

I highly recommend reading this book. Although Zappos is an internet company, this book is written for a much wider audience. It focuses on things at a high level. He doesn’t talk too much about the technical details of running Zappos’ site. I think it teaches a lot about company culture, brand, and ethical business.

For more information about the book, please visit http://www.deliveringhappinessbook.com

In the interest of full disclosure, we received a few advance copies of the book, free of charge from Zappos. They only asked that we give it an honest review, which we have.


Yesterday, John Gormley Live featured a story about the Regina Qu’Appelle Health Region requesting proposals for a third-party CT scanning center. There are currently three units in operation and a fourth unit would reduce the waiting for this treatment. Health Minister Don McMorris said that this will reduce wait times for patients. Based on the information shared, I see three possible ways to view this move.
The first way to look at this is through a political lens. One might see having services being transferred to a third party is a move towards privatizing health services. This is a hot-button issue in Saskatchewan because of our history of medicare. Minister McMorris explained that the third party would be paid by the health region and there would be no queue jumping. In addition, this is no different from medical labs and ultrasound testing providers. I feel that this is a moot point: to anybody that is waiting in line for life-saving treatment or diagnostics, how it gets done doesn’t matter. Getting top-quality, fast treatment is all that matters.
This leaves two choices, brilliant or useless. In order for this to be considered to be brilliant, one condition must be satisfied:  the increased capacity will protect or elevate a constraint.  To explain this, consider the treatment of a patient as a series of steps.  For simplicity, we will look at initial visit, diagnostic testing and treatment/surgery as the three main steps.  The increase in capacity will definitely decrease the lineup in front of CT Scanning, but will it shorten the time for patients to get treatment? There are two ways that this can happen.

The first is if CT Scanning is the constraint in the treatment process, an increase will increase the speed of treatment and reduce wait times.  This makes the move brilliant. If the constraint is elsewhere, like surgery/treatment, this won’t do much to improve patient treatment.  People will be lined up for treatment instead of CT scans.  This gets us close to a useless verdict.

Well, not quite useless.  A second way for improvement is more timely CT scans will allow for simpler, faster, more-effective surgeries and other treatments.  If treatment and surgery is the constraint in the process, this will help, but not as directly as the first scenario.

What is the goal of a health region? A good generic one is “To treat more patients better, now and in the future.”  The radio show described that that other health regions have these scanners and are not always fully utilized.  If the health regions pooled this capacity, they could get higher capacity without the third party.  This would get them closer to their goal.  If the system constraint is not CT scanning, this initiative will do little to get them closer to their goal.  If the increased scans overwhelm the ability to treat the issues, we will still be limited by the treatment step.  If treatment is the constraint, health regions need to protect and elevate that constraint if they hope to make breakthrough improvements.  I’d like to hear from health care professionals to see which scenario is the case.


Commercial Mortgage Guidelines

Commercial mortgages are broken down into two categories:

  1. Owner occupied
  2. Investment property

The lending guidelines are going to be quite different for each type of mortgage but there are some similarities. An appraisal will be required in each case to establish the value of the property. Plan on spending a minimum of $2,000 for a commercial appraisal. It is also possible that an engineer’s report will be required, particularly if there are any concerns about the soundness of the structure of the building. An environmental assessment will have to be conducted by the bank. If this assessment finds any areas of concern, a full Phase 1 environmental report will be required. Phase 2 and Phase 3 reports could be required, depending the results of the preceding reports. The bank takes environmental liability very seriously (you should as well) because the cost to clean up a contaminated site could be devastating.

Unlike a residential mortgage, you’ll have to pay the cost of the above reports along with the legal fees for registering a mortgage. As a result, closing costs can be quite significant and they need to be planned for.

An owner occupied mortgage has a lower approval standard that must be met. Cash flow from the business must be sufficient to make the mortgage payment each month. The bank will look at your financial statements for the past few years to determine how stable you cash flow is. This gives them a degree of certainty that the mortgage will be paid. Lending value for a mortgage of this type will be in the 50% to 75% range. This means that the down payment will need to be in the range of 25% to 50%. This will depend on the marketability of the property. For example, a single use property in a rural area may be given a lending value of less than 50%. This is because if the bank foreclosed on the property, it would be very difficult to sell for a good price. The maximum amortization for this type of mortgage is usually 25 years.

Investment property mortgages have a higher standard of approval. The property must pass a cash flow test that shows that the rents from the building can cover the mortgage payments plus costs associated with maintaining the building. The bank will want to see historical rent rolls so that an average rent and a vacancy rate can be established for the cash flow test. With these types of mortgages, the amortization will have to be 75% or less of the remaining economic life of the property as determined by the appraiser. This can often result shortened amortization times. Lending values and down payments are generally the same as for owner occupied property. It is possible to get CMHC insurance on some types of properties such as apartment buildings, but the cost of the premium usually makes the insurance too costly.

It’s best to talk to your bank or credit union before shopping for commercial property. Lending guidelines can vary widely between institutions. It’s important to make sure that your Commercial Account Manager has expertise in these types of deals. They can be complex and therefore difficult to get approved. You’ll want an experienced person working with you.

{ 1 comment }