The result of the global COVID-19 pandemic implies, for many people, an evaluation of alternatives for the fulfillment of goals and objectives, some of which imply the investment of resources for the construction of those dreams. These resources can come from various sources: own savings, sale of an asset and, one of the most common, the search for financing through the various banking entities in the country. Randall Castillo is the founder of RACO, a financial adviser and investment company serving small businesses in Costa Rica and Panama, and shares insight into what Costa Rican small business owners should consider when approaching subject of credit.
One of the frequently asked questions and reason for much analysis is whether it is the ideal time to obtain financing – an element, sometimes necessary, so that all these aspirations can be realized – or if, on the contrary, it is convenient to wait for that other conditions exist in the market. Explains Castillo, “If the salary is received in colones, it is preferable that the loan is obtained in that currency; on the other hand, if it is earned in dollars, there will be no problem if it obtains financing in that currency.”
Obviously, all the factors must be taken into account, but it is essential that the person make an assessment of their ability to pay, in order not only to pass the filters when carrying out bank management, but also that their own financial tranquility does not be affected.
To do this, you must take into account what the current expenses are and the impact that the payment of a loan installment will have on them, the availability of liquidity that you will have when facing the new loan and the objectives that you intend to achieve with that money. All these evaluations must be carried out carefully; otherwise, the credit obtained can become a rather difficult burden to handle and that will negatively compromise finances.
The general recommendation is that the level of general debt should not exceed 35% of the resources that the person receives each month; Beyond that, it could create problems in the sense that no one can foresee a future emergency and the need for additional money to deal with it, so it is important to have a certain level of slack.
In the same way, the type of credit that is going to be requested and the specific purpose of the same must be evaluated very well. It is not the same to commit economic assets for thirty years to do it for five or seven years. Opting for a personal, pledge or mortgage loan will depend on the objective that is set with the resources that I will receive. Finally, and enters into the valuation game to be carried out, it is the currency in which that debt will be acquired.
The problem arises when those who receive wages or income in colones go into debt in foreign currency, mainly in the American one, as they are exposed to a series of fluctuations and changes that can negatively affect them. Adds Castillo, “Assessing these elements in depth will allow you to determine whether or not it is the right time to make a decision of this type, remember that it is about minimizing risks and making the most of the possibilities offered by the financial system.”
As in any business in which the parties involved do not want to take greater risks than necessary, it is the same with banks. For this reason, institutions usually require a credit guarantee before granting any loan. Says Castillo, “Normally, banking institutions require 100 to 200% guarantees on the total amount financed before they’ll consider extending any type of credit.” For this reason, it is often more beneficial to discuss financial options with credit facilitators who are more in tune with the financial environment and can offer better terms.