Last week, as you can read in this article, credit rating company Moody’s downgraded the status of the United States Government debt from Aaa to Aa1 – which is a downgrade of one notch.  In making the recent downgrade, the article states:

“The US has lost its last perfect credit rating, as influential ratings firm Moody’s expressed concern over the government’s ability to pay back its debt.

In lowering the US rating from ‘Aaa’ to ‘Aa1’, Moody’s noted that successive US administrations had failed to reverse ballooning deficits and interest costs.

A triple-A rating signifies a country’s highest possible credit reliability, and indicates it is considered to be in very good financial health with a strong capacity to repay its debts. . .  . . . .

The downgrade “reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns. . . . “

 

From my point of view it is a sobering thought on the ratings of U.S. Government debt.  And, I also believe that there may be some consequences to business because of this decrease in ratings.

In my opinion there is somewhat of a “comparable” nature to debt and interest rates companies may receive from their lenders.  And, I believe those rates start at two points — one point is the rating of the United States Government and the second point is the Federal Reserve’s “Federal Funds Rate”.  That is the base interest rate that we hear the “Fed” talk about raising and lowering to maintain the economy without inflation.  Currently, the Fed has a target rate of 4.25-4.50%.

What might this mean for your funeral home?  —  It’s my opinion that when you go in to see your lender they think first about your ability to pay back the loan.  It’s a risk/reward system so they will give you a lower rate if they believe you have a very good chance at paying the loan back. . . conversely, if they believe your cash-flow might be restricted for some reason or another they may still offer you a loan, but at a higher interest rate.

And, they cannot help but think about defaults.  The U.S. Government rating just being downgraded will weigh on their decision simply because it is a psychological negative on credit in general.  I also believe this current rating drop will have a psychological effect on the position of the Federal Reserve Board and their thought process about lowering the targeted Federal Funds Rate — which may keep interest rates “higher for longer”.

Quite frankly, again in my opinion, a United States Government credit rating drop is simply a negative in the universal sphere of credit, one’s thought on creditworthiness, and the ability to move to lower interest rates.  There is nothing I see about this ratings drop that will help any of us, individually or as a business, gain credit or gain a more favorable rate.

Tom Anderson
Funeral Director Daily

My time on a credit board —  When I served on the University of Minnesota’s Board of Regents I was tasked with being the Chairman of the Debt Management Committee for four years.  I learned in some depth about the ratings systems and learned that it was a very big positive to have a great credit rating from the likes of Moody’s.  Our high ratings led to extremely low interest rates as we used credit for everything from building our own power plant to a new athletic complex – selling bonds at the extremely low rate of approximately 2-3%.  The University of Minnesota maintains an Aa1 rating from Moody’s — the same as the new rating on the U.S. Government.  Here’s a short note on that from Google:

“The University of Minnesota currently holds an Aa1 credit rating from Moody’s, with a stable outlook. This rating reflects the University’s strong financial position, brand reputation, and favorable student demand and research trends. The University’s Budget and Finance office indicates that Moody’s last action was in April 2022, and they have continued to affirm the Aa1 rating.” 

What about Death Care credit ratings? —  It is extremely difficult to acquire and maintain the highest ratings in a credit rating . . .such as Aaa from Moody’s or AAA from Standard & Poor’s.  However, in a quick search on ETrade I found five entities with either an Aaa rating from Moody’s or a AAA rating from Standard & Poors.  Realize now, that with the current downgrade of the United States Government, the following five entities have a better credit rating than the U.S. Government rating that is backed by the “full faith and credit” of the taxpayers of the United States.  The five I found were:  Johnson & Johnson, Microsoft, Harvard University, Stanford University, and Yale University.

Comparatively, I found credit ratings for Service Corporation International  (SCI), the company most would say is the strongest in the Death Care world to be BA3 from Moody’s and BB from Standard & Poor’s.  I think that shows the difficulty in becoming “A” rated by the ratings companies.  Most people who understand and follow Death Care do not see SCI being a company that will default on debt anytime soon. . . . Yet, they are not “A” or higher rated.

As an investor I buy bonds from time to time.  Generally, I do stick to “A” rated or better bonds. . . . .However, as a Death Care professional I also look at the realities of SCI and have two bonds that I have purchased from that company.  One has a yield of 5.125% and matures in 2029 and the other has a yield of 5.75% and matures in 2032.  At the time I bought them bank certificates of deposit were paying about 4% so it was a case where I believed the increased yield was worth the risk involved.

Why Moody’s cut America’s credit ratings.  Direct from Moody’s

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Business Loans vs. Credit Cards: Pros, Cons, and When to Use Each

Understanding the pros and cons of credit cards and business loans is essential when managing business finances. Each option offers unique benefits and risks, so knowing when to use one over the other can make a big difference in sustaining financial health.

The Benefits of Using a Business Credit Card

Business credit cards offer several advantages for small expenses. One of the top benefits is the ability to earn perks, with many cards offering 1-3% cash back on purchases. If a business consistently funnels transactions like utilities, gas, or other recurring expenses through a credit card, these rewards can add up, potentially offsetting costs and contributing positively to the bottom line.

Credit cards simplify expense tracking and tax preparation, as all purchases are documented on a single account. Many credit card providers offer tools that organize spending categories, which can help monitor business trends and make data-informed decisions. For companies with multiple employees authorized to spend, credit cards create accountability by providing a transparent view of all transactions, aiding in tracking and budgeting.

Potential Drawbacks of Business Credit Cards

Business credit cards come with significant risks despite their convenience, mainly due to high interest rates. Failing to pay the balance in full each month can lead to interest charges as high as 20% or more, which can quickly eat into a business’ cash flow.

Additionally, the easy accessibility of credit cards can lead to overspending if not managed carefully. Business owners should be disciplined, ensuring necessary purchases and fit within the budget to avoid a debt snowball effect.

Advantages of Business Loans Over Credit Cards

Small business loans often provide better terms than credit cards for larger purchases or cash flow management. They also provide flexibility with lower interest rates, allowing businesses to borrow at a more affordable rate. Small business loans are ideal for larger expenses, like significant equipment purchases, because they provide a fixed amount with structured repayment terms. Unlike credit cards, these loans often come without prepayment penalties, allowing businesses to pay off the loan early without additional fees. This flexibility can be helpful when cash flow fluctuates, or additional capital becomes available.

Choosing the Best Option for Your Business

Business credit cards and loans have their place. Business credit cards can be incredibly convenient for day-to-day expenses but should be used cautiously to avoid high-interest debt. On the other hand, business loans are better suited for larger purchases or cash flow needs, providing a healthier, more affordable alternative.

Understanding the pros and cons of each option allows business owners to take a strategic approach to finance, ensuring that they make decisions that support growth and financial stability. When chosen carefully, both options can contribute positively to a business’ financial management.

Download Live Oak Bank’s free Guide to Ownership Transition or connect with Andrew Kennedy, VP of Funeral Home and Cemetery lending, at https://info.liveoakbank.com/guide-to-ownership-transition.