The State of Credit for Business
From 2008 through 2011 a common theme was “none of the banks are lending.” For many business owners in Michigan this was a true statement. Mega-banks, large regional banks, and many longtime community financial institutions tightened their purse strings, stopped lending, and in some cases were the cause for certain Michigan businesses to shut their doors. Some of this was caused by regulation and some because the financial institutions were finally forced to deal with loans that had been bad for long enough. The affect was the same: access to credit for many small- and medium- sized businesses in Michigan was limited.
Prior to the recession, banks were continually increasing loans made to small businesses. From 2008 to 2011, however, small business lending dropped between 16 percent to 20 percent. During this time many non-traditional sources of commercial credit tried picking up some of the slack. This, however, did not meet the credit demands of small business at that time.
In 2012 the tide started turning and, since then, small business loan portfolios across the country have grown by an average rate of six percent. According to the Federal Reserve, in 2015, 82 percent of small businesses that applied for financing received at least some of the credit they sought, a year-over-year increase of 17 percent.
Some of this increase was a result of financial institutions working better to serve their small business customers, some was due to a low-interest-rate environment, which has encouraged greater taking of risk at financial institutions, and some of this increase was because of increased competition in the business lending marketplace.
Interest rates have increased and the Fed has telegraphed its intention to increase rates three times this year with quarter point increments. This would still likely leave the WSJ Prime Rate of Interest around 4.5 percent (less than the historical average of 7.04 percent and the median of 6.5 percent). Low rates translate into cheap capital for businesses.
The low-rate environment has hurt the profitability of many banks and credit unions as spreads (the difference between what the institution borrows its money for and what it can lend it out at) have narrowed, due to pressures that many of these institutions have faced in growing their balance sheets. The pressure to grow for these smaller banks and credit unions can partially be attributed to burdensome and costly regulations. One solution has been to scale up and grow.
Competition in 2017 will be fierce for banks and credit unions as they all face growth goals in the face of a shrinking small business sector. American entrepreneurship is at a 40-year low and although many of these companies fail within their first year, the survivors make up a huge portion of the lifeblood of small business lending. The opportunities to finance newer businesses have shrunk, forcing many banks and credit unions to battle for a slice of their competitor’s pie. Many times this can simply be trading assets between banks; however as credit unions have increased their commercial lending repertoire, they will not be burdened by “legacy portfolios” (loans already on the books) that will affect some of the larger banks, allowing greater options for the credit consumer.
ACCESS TO CREDIT
FinTech (a line of business based on using software to provide financial services) will continue its push into the small business lending marketplace. Many of these companies are focused on lending to the small business community and generally have quicker turnaround times and are less burdened by regulation. Alternative lenders such as On Deck, Kabbage, and Lending Club have carved out more than $35 billion in loans since inception, and now firms like Goldman Sachs are entering this space. Some of the pricing structures offered via FinTech are confusing and more costly than traditional financing; the speed and execution of these transactions may make up for the costs. While many bankers believe their client relationships will stand the test of FinTech, many are simply not prepared for a world in which accessing money has become increasingly commoditized. For a small business owner, this increase in the supply of credit is a good development.
Increased real estate and other collateral values play a role in improved access to credit for many business owners. Commercial property values have rebounded toward pre-recession levels. Occupancy nationwide on investment real estate has also increased to levels that give borrowers greater purchasing power in financing real property. As collateral values have increased, fewer and fewer banks are calling loans due to collateral reasons. Less troubled loans means more credit availability.
The newly-elected president points to a pro-small business outlook for the next few years. If the campaign promises of massive infrastructure spending hold true, the ancillary growth from the construction industry will likely spill over into many other industries. This potential growth cycle will continue to be a boon for small businesses and many will find the more successful they are, the more lenders will continue knocking at their doors.
Within one hour of Traverse City, the small business owner has access to more than 25 different financial institutions all looking to invest in small business. The conversation at one time may have been “none of the banks are lending. The conversation today is almost “who isn’t lending?”
Geoff Streit is Vice President of Commercial Lending for 4Front Credit Union. The views expressed are his own and not the views of 4Front Credit Union.