Issue link: http://www.insightdigital.biz/i/107253
insight on COMMERCIAL L e n d i n g By Tom Groe nfeldt 'Skin in the game' Lending trends positive, but banks maintain strict standards for small business loans B anks 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 30 | Insight • F e b r u a r y 2 013 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 w w w. i n s i g h t o n b u s i n e s s . c o m