Small business owners want to know why banks aren’t lending or won’t renew their loans.
The era of fast, loose and easy loans seems to have evaporated for the foreseeable future.
During a recent Entrepreneurial Corner at BiggsKofford P.C., several bankers talked about why loans cannot always be renewed and what the industry is battling as it attempts to balance capital and lending.
Although the contrast between the current lending environment and several years ago seems “stark,” said Doug Woods, group president of southern Colorado and Denver for Great Western Bank, in reality, lending “five years ago was unrealistic — and what we’re (the industry) doing now is overreacting. The regulators are as unyielding, unrealistic and ultra-conservative as I’ve ever seen in my (28-year) career.”
While regulators say they’re attempting to encourage lending, that doesn’t exactly square with reality.
According to regulatory requirements, banks may only have a concentration of commercial real estate loans up to 100 percent of capital limit. Investor real estate is capped at 300 percent of capital limit.
Therefore, banks with such loans on the books must increase their capital, Woods said.
And the only way to increase that ratio is to decrease loans.
“Most community banks in this town were over-concentrated in real estate loans — because those are the loans available in this town,” said Steve Ingham, president of Academy Bank.
“Our access, as a national bank, to capital eases some of our pain, but we also have stricter regulatory requirements,” said Grant Ary, Wells Fargo’s manager for the Colorado Springs downtown market. “We borrow money from depositors, and we have to be a good financial steward of their money.”
And instead of quarterly payments, banks are now required to pre-pay three years of Federal Deposit Insurance Corp. payments.
Imagine having to pre-pay your vendors for three years, and you’ll begin to grasp the enormity of such a payment.
“The FDIC increase in insurance premiums has cost all of us a tremendous amount of money — and we have to (pass that cost along), or we don’t stay profitable,” Ary said.
The enforcement of regulations has changed more than the regulations themselves, Ingham said. “And the regulators are blamed by Congress for the situation. We’ll see more regulation changes as a result of this.”
Return on equity and return on assets are different today, “And I don’t think investors have made that (mental) shift yet,” Woods said.
Some small business owners are living in the past, expecting loans and terms that are “not the reality of the world today.”
And banks have to determine whether they can collect on whatever is offered as collateral.
A small business owner who does government contracting, for instance, might think that with good credit, obtaining a loan should be simple.
But banks cannot obtain liens on government accounts receivable.
The best thing small business owners can do is communicate with their bankers — long before they need a loan or their loan is up for renewal.
“You negotiate the terms of the loan, and then you enter into a contract,” Ary said. “As the market changes, the renegotiation of that contract is (critical), as well as communication.”
Basic economics dictates that banks pass on the cost of increased FDIC insurance to the customer, just as freight companies did during 2007 when fuel prices increased.
“Passing cost along to the end-user is a natural function of reality,” Ary said. “Ninety-nine percent of the time, we have to be right (about a loan). That’s not a lot of margin.”
Banks that have loan losses of 1 percent to 2 percent on an ongoing basis will fail, Woods said.
The industry had trouble because “bankers got away from pricing for risk — because they were pricing to be competitive,” Ingham said.
And it’s not as though all banks have stopped lending — it only seems that way. But, before the liquidity crisis and housing market collapse, the majority of commercial loans were made by non-bank lenders.
“But non-bank lenders either failed or pulled out of the market because they were doing non-recourse loans,” Woods said.
The bottom line: No one has all the financial and lending answers without knowing the future.
But no matter how successful business owners might be, it’s imperative they develop and nurture relationships with bankers.
Then, whether the market is abundant and liquid or dry and illiquid, entrepreneurs will be better prepared to expand their business or stay afloat — whichever the current economy dictates.
Rebecca Tonn covers banking and finance for the Colorado Springs Business Journal.