Bankers are taking longer to issue business loans and asking for more collateral when they do issue them, according to bankers around Richmond.
Even companies with solid credit and long-established relationships are having more trouble getting financing, which is an essential ingredient for growth. The number of loan requests, meanwhile, is also falling.
“Entrepreneurs feel like expansion may not be the right thing to be doing right now,” said David Fairchild, the CEO at First Market Bank, adding that requests for new lines of credit have decreased around 30% in the last several months.
Fairchild said lending standards are getting stricter.
“There’s a lower chance of getting repaid,” Fairchild said, noting the weak consumer confidence and high gas prices. “Overall, we’re seeing companies that are decreasing in profitability.”
Although local banks are not suffering form the huge subprime write-downs plaguing some bigger banks (i.e. Wachovia), as the economy sours, so do some loans, in particular real estate and auto loans. Banks themselves are less profitable now than last year.
And so bankers are looking harder at and taking longer to decide on authorizing any new business loans.
Several big hotel projects have been shelved because lenders are unwilling to strike a check, bankers say, doubting that the hotels will be profitable.
And there’s reason to be more careful. Certain businesses are taking longer to make loan payments, and entire sectors are under greater strain; retail and real estate, in particular. Defaults are starting to creep up, according to bankers.
Overall, the value of credit held by banks nationwide shrank 1.5% from the first quarter, according to Federal Reserve data. In an April Fed study, 52% of surveyed bankers said they tightened lending standards for companies with annual sales of less than $50 million.
John Neal, president and CEO at Union Bank & Trust, said his bank hasn’t changed down payments, but that the bank is looking much closer at each loan and approaching some sectors with trepidation.
“What we’re seeing is really domino effect ripples from the decline in housing,” Neal said.
New deals are requiring more due diligence, which involves an examination of any collateral. Because any collateral might have to be sold if a business fails, lenders have decreased the amount in which they will lend because those assets are harder to liquidate in a slow economy.
“There’s no market for it if the loan goes into default,” Neal said.
When Union Bank & Trust looks at a potential client’s books, it’s taking those financials statements with a grain of salt because the previous three years were during good times – and pre $4-gas.
“We knot some businesses are not going to be able to perform at same level as in 2006 and 2007,” he said.
When the bank agrees to lend money, it’s valuing any property or collateral at a lower rate.
However, at least one local bank says lending standards have not changed. Virginia Business Bank, which opened less than two years ago, has largely avoided any fallout from the subprime market. The bank does not do car loans, avoiding another trouble-spot.
“So far, we’ve not had to come back and say we’re going to lend less against receivables, or less against raw materials,” said Merlin Henkel, the president of Virginia Business Bank.
The bank has loaned out $42 million so far this year, bringing its total loan portfolio to $110 million.
More reading: Worried Banks Sharply Reduce Business Loans (New York Times) July 28, 2008