To find a bank that aggressively tries to make new business loans is truly a challenge these days.
One Wall Street stock analyst who follows banks recentlestimated that there are about 50,000 bankers across the nation who have lost their jobs in this recession with about 10,000 in the region stretching from Boston to Washington. A lender from one of the local regional banks recently said, "I'd love to be making loans like we did just a year ago, but times have changed. I'm NTC afraid that if I make one more difficult loan, then I'll lose my job."
Bank lending policies have changed drastically since the period during the 1970s and 1980s when banks were in stiff competition with each other to make loans. For the business borrower, this was a stroke of good fortune. A prospective borrower could obtain a loan as long as there was adequate collateral. In many cases, the collateral was the business owner's home.
Then the housing market weakened and the nation entered a recession. Suddenly the banks were in possession of collateral at a time when the market price for housing was weak. Most lenders began to rely more heavily on the cash flow of the business. This new emphasis on cash flow has forced many business people to put their plans on hold.
Al Broaddus, senior vice president and director of research for the Federal Reserve Bank of Richmond, Va., says that as the economy moves toward recovery -- which it may be doing now -- many banks will loosen their tight lending policies. He feels many banks may have overreacted to positions taken by the Fed. As a result, the Fed started a communication process to calm the fears of the local lenders. He says there is "ample money in the banking system to make business loans."
Would-be borrowers are also affected by the thundering herd of baby boomers who are vying for business loans. These people between the ages of 33 and 47 have moved up through their respective companies only to find that corporate America has not significantly changed its structure since the 1940s. The companies are still pyramids with a limited number of seats at the top. This creates a dilemma for the stymied achievers. Even before the recession brought widespread job cuts, corporations were already in the process of streamlining middle management. Baby boomers have been squeezed out as part of the structural change intended to help companies become more competitive.
What happens to these people? Many of them decide to start their own businesses, which means they flood bank offices with loan applications. In the face of the onslaught, bank officers can be picky.
Businesses become more interested in borrowing to expand their operations at a time when interest rates are low. Just over a month ago, banks lowered their prime rate to 8.5 percent from 9 percent. Commercial banks base their prime lending rate upon the rate at which they can borrow money when they need it. The Federal Reserve has pushed down the discount rate, the rate it charges banks for loans, three times since last December. The overnight federal funds rate, which is the rate banks charge each other for short-term loans, has also dropped.
The Bottom Line: Obtaining a business loan will require both good collateral and strong sales projections. Be sure your formal business plan supports your projections with facts and figures and not by using blue smoke and mirrors.
Patrick Rossello, president of the Business Consulting Group, is a member of a number of local advisory boards. His column appears the first Monday of the month. Send questions or suggestions to him c/o Money At Work, The Evening Sun, 501 N. Calvert St., Baltimore, 21278.