INSIGHT ON: Commercial Lending – "Skin in the game"

Posted on Feb 4, 2013 :: Commercial Lending , Insight On
Posted by , Insight on Business Staff Writer

Lending trends positive, but banks maintain strict standards for small business loans

Banks are lending to businesses, perhaps not at the rate as they were in 2006, but more than they were a couple of years ago. They are, however, asking for “skin in the game,” as two different lending executives phrased it.

Lending is better than it was, but it is still tight, says Sam Perlman, economic development manager at the Door County Economic Development Corporation. “But I’m not seeing lines of credit being pulled like they were three or four years ago.”

Pending changes in capital gains and depreciation prompted business acquisitions equipment purchases in 2012, says Wenda Roycraft, senior vice president for commercial banking at First National Bank Fox Valley. Last year she saw many businesses acting cautiously and deposits increasing, but the bank also saw more capital expansion and firms buying other businesses, including one case of participation in an acquisition by an investment group.

“We saw manufacturing companies in this market having good solid trend years, some healthy financial performance and some firms taking advantage of the opportunity to grow through acquisition. Our past due loans are the lowest in five years, and that was true all year long,” Roycraft says.

Deep down, commercial banking hasn’t changed, says Gordy Weber, executive vice president of commercial banking for Associated Bank. Character, capacity and collateral remain the basics of lending. Weber admits, however, the fundamentals are applied with more discipline than they might have been five years ago.

“Back then everyone was doing very, very well and it seemed we were on an upward trend,” explains Weber, who is responsible for the lakeshore region from Sheboygan north. “Banking is competitive and you do have to respond to the marketplace.”

Or as Mike Langan, senior vice president at BMO Harris Bank puts it, “One hundred percent financing is not as prevalent as it used it be. One of the things we are looking for is that the business owner has some skin in the game.”

As managing director for commercial lending in Northeast Wisconsin, Langan says the bank wants to see business owners with an equity stake and sufficient cash flow to pay back a loan. Reaching an agreement often involves reviews of a company’s business plans and forecasts, a customary practice that is now applied more rigorously than was sometimes the case in the past.

“Now when we get a loan applicant, we scrutinize their preparation in applying for a loan,” says Associated Bank’s Weber. “We want to make sure they understand the risk in borrowing. We want to be supportive, but not frivolous in advancing money. Now the business plan is critical in demonstrating that they understand their business and have forecasts on how to repay the loan. While we always wanted forecasts, we probably didn’t get them to the degree we want now.”

A loan application often leads to an extended discussion, says Langan at BMO Harris. On an equipment loan, the bank might ask if the owner has considered buying used equipment or whether the business could use an outside vendor instead.

Jamee Mangold, vice president of business banking at Wells Fargo and manager for northeast Wisconsin, says business lending was up in his sector by 25 percent in 2012 over 2011, some of it from existing customers, some taken from the competition. The bank maintained discipline in its lending before the recession so it was able to understand clients who had problems and help them out, he adds.

“The fact that we understood the intricacies of our customers’ businesses meant we could help them through their troubled times,” Mangold says.

In the current economy, banks are insisting more on significant equity stakes by the owner or asking for some guarantees such as using a home for security if the owner or entrepreneur doesn’t have cash. But using a home as security isn’t as easy as it once was; declining real estate values mean an owner may not have the equity in a house that he thinks, says Weber.

Another source of financing is lending backed by the Small Business Administration (SBA). Associated Bank is a leading SBA lender in Wisconsin, says Weber. The U.S. Department of Agriculture also offers loans for businesses that can demonstrate they will create jobs, Weber says, although Associated is not a very active participant in that program.

New players are also getting into lending. The Green Bay Area Chamber of Commerce has an economic development arm, Advance, which provides some lending to companies which haven’t qualified for bank loans. The Door County Economic Development Foundation in January incorporated COIN – Community Opportunity Investment Network – which will pool funds and combine loans with business education and mentoring. It is six to 12 months away from raising funds for the program.

Bankers are cautiously optimistic about 2013, partly because 2012 was so miserable. The nearly endless presidential election process, arguments in Washington over the deficit, budgets, health care and taxes, and the political turmoil in Wisconsin cast a gloomy pall over the entire year. Business owners across the state were mildly depressed most of the year and then mildly surprised when they looked at their results and realized they had done pretty well financially.

Business still faces a lot of uncertainty, says Weber, but the outlook is more positive than was expected a few months ago.

“Optimism is building, and there is an incredible amount of cash in the system. We have a tremendous amount of liquidity to lend, and private equity firms have tremendous amounts of capital. Some of the prices for businesses are moving up to pre-’07 numbers, which makes it attractive for an owner to sell his company at high multiples.”

Langan agrees on the outlook. People are yearning for some stability and clarity, he observes.

“There is a fair amount of momentum and people are starting to become a bit more aggressive in thinking about growing. They see opportunity.”