Flush with cash and eager to lend
One banker says some banks may even be getting a bit reckless again.
“Lending is very robust,” said Eric Seifert, a business growth specialist at the GVSU Small Business Development Center in Muskegon. “A lot of banks are chasing the deals these days.”
He added, however, that banks “are still more conservative” than they were before 2008, “but they’re very hungry to do deals.”
Michael Rogers, a vice president at the Small Business Association of Michigan, said, “We’re hearing about better access to credit.”
He said many companies that survived the Great Recession are still reluctant to borrow, however, and banks are fussy about who they will lend to.
“Oftentimes, what the banks consider good customers aren’t necessarily in the market for credit,” said Rogers.
“Both large and small banks have great capacity to lend and are eager to do so. Lending is how they make money,” said Harvey Koning, a partner at Varnum law firm in Grand Rapids.
Koning is involved with Varnum’s MiSpringboard program, launched in 2011 to help new and second-stage businesses grow by providing free legal services to entrepreneurs with good ideas and limited means. The law firm committed up to $1 million to MiSpringboard, and has helped more than 100 start-ups. Most are small businesses with fewer than 10 employees.
“We represent borrowers here at Varnum, but I also represent community banks, so we see it from both sides of the table,” said Koning.
While banks have great capacity to lend, “they are also very focused on quality,” said Koning. “They went through the Great Recession and really took their lumps on some of the more aggressive loans that they had made before the Great Recession, and they’re focused on not repeating those same mistakes. For the strongest borrowers, there is intense competition for their business, and banks large and small will eagerly compete to make loans to the strongest borrowers.”
Seifert said banks traditionally did not offer loan terms longer than five years at a fixed rate. After that, the rate would re-set, which involved new negotiations between lender and borrower. But now, he said, “Some banks are very aggressive with fixed rates. I’ve seen 10-year fixed rates on small business loans, which is almost unheard of.”
Seifert said he has even seen a deal on a 10-year fully amortizing loan with SBA backing for 4.2 percent. “That’s outstanding,” he said, “and the same applicant was quoted 3.8 percent on a seven-year fully amortizing loan.”
With the economy improving, many baby boomers now are willing to sell their businesses, and there are buyers. Seifert has been involved with helping both buyers and sellers.
“That’s really ramping up like crazy, too, and banks are becoming aggressive in that,” he said.
Typically, a business sells for much more than its assets are worth, so in the past the seller was often required to finance part of the transaction in conjunction with the bank. “But now, more and more of the banks are wanting to do the whole deal and not requiring a seller note.”
Recently Seifert was involved with helping a buyer get financing for buying a business. The equipment was worth about $100,000 but the sale price was about $600,000 — and one bank wanted to finance the deal with no seller note whatsoever, “which is pretty aggressive.”
Companies with fixed assets, such as manufacturing companies, are more “bankable,” he said, than other businesses such as retail, where the collateral is inventory and can be more difficult to liquidate. Service businesses also tend to be less “bankable” when it comes to getting loans, due to soft collateral.
Seifert said a small business owner with a good earnings history, good personal credit record and experience in that business sector has a better chance to get a bank loan “than two or three or four years ago.” He said, however, he would not say the loans are easy to come by.
Small business owners can do two things to improve their chances with a bank, according to Konig. The first step is to establish and grow a relationship, which builds a foundation of trust. The second step is to invest in quality financial reporting, said Konig. Business owners need to have well-prepared, sound and consistent financial statements to build credibility.
“Nothing is worse than giving a bank financial statements and later going back and having to explain that they were incorrect,” said Konig.
At one of the largest community banks headquartered in Michigan, the CEO says the bank is experiencing much stronger demand for commercial loans in 2014 compared to 2013. Brad Kessel said loan demand at Independent Bank is up “probably across the board in terms of the commercial segment,” for both the commercial/industrial market and the real estate investment market.
He attributes the large volume of bank capital today to an improving economy, plus the fact that the recession left both consumers and businesses reluctant to spend as freely as they had before.
“A lot of people have stored up that money in their checking and savings account,” said Kessel.
The banks are now being very competitive in their efforts to get that capital working as loans, he added. In many instances, he said, there are four and five banks “at the table” when a business is shopping for a loan. But he noted that banks “have to be wise in terms of both your pricing of a deal and the concession on terms. We’re not getting every deal that we’re looking at.”
And he was referring only to “the very creditworthy” borrowers. Another segment of would-be borrowers that might be described as “middle of the road” are often frustrated because “banks are looking real close” at them before deciding to loan or not.
The regulatory presence, he said, has “exponentially increased, in terms of the expectations of our federal and state regulators,” when it comes to loan underwriting. That means more pressure on the banks for down payments and firm documentation on the borrower’s ability to repay the loan.
Brad Henion, president of First Community Bank in downtown Grand Rapids, which was previously known as Select Bank, said there is a lot of capital ready to be deployed. Banks have strong balance sheets and “are willing to lend a lot of money right now,” he said. But there are a lot of banks competing “and not enough quality borrowers at this point,” he added.
Henion defines quality borrowers as those with low leverage on their balance sheets and a track record of earnings, with good management and financial reports.
He notes that it is the regulatory environment today that helps determine who is creditworthy.
“The compliance and regulations that we are under right now is incredible,” said Henion, stemming from the 2008 and 2009 financial industry crisis and the government’s reaction to it. For example, Henion noted he has 10 employees in First Community’s downtown location, but there are 14 government regulators assigned to that location.
Ironically, the pendulum may be swinging back toward the credit environment that contributed to the financial crisis of ’08 and ’09.
“Banks are getting very aggressive, and they are starting now to repeat the patterns that were there before,” he said.
When asked if he considers some of those too risky, Henion said “yes.”
“I wouldn’t say all of them are, but there are some very aggressive banks that want to grow and are repeating the same mistakes that were made before,” said Henion.
For its part, he said First Community is “well capitalized; almost 15 percent capital,” and is “choosing wisely the companies that we want to grow with — our partners.” First Community is a $200 million bank — “one of the smaller community banks,” said Henion.
Adding to the pressure of the loan competition are credit unions, according to Seifert at the SBDC.
“A lot of credit unions are getting involved in commercial lending. They’re hiring experienced commercial lenders away from the banks and they’re getting very aggressive,” said Seifert. “It’s a very healthy lending environment out there right now.”
He cited Lake Michigan Credit Union and My Personal Credit Union as just two of the CUs that are “very active” in commercial lending.
“Unfortunately, I can’t get any of the Muskegon credit unions to make business loans yet, but I think they’ll see the day,” said Seifert. “Consumer lending is way down, even with the improving economy, so credit unions have a lot of money to invest.”