Navigating the Small Business Lending Crisis
Talk with any developer or general contractor and you will likely hear the woes that finding and securing lending can be difficult. Numerous industries, particularly those in real estate development, are struggling to find new and potential alternate methods of securing project financing.
A recent article in Fortune (magazine) reported on comments made by Federal Reserve Chair, Jerome Powell. Mr. Powell admitted some banks are in trouble based on the level of their commercial real estate holdings and losses are expected. He stated he is “keeping an eye on commercial real estate” as it pertains to the banking system “very carefully”. As we explore the phenomenon of tightening the lending market more within this article, the reader may ask “does the type of work I undertake impact my borrowing ability?”.
Goldman Sachs, an American multinational investment bank and financial services company, suggest lenders with less than $250Billion in assets hold 80% of commercial loans. With expectations of what may be write-offs, banks with large concentrations of commercial real estate loans may experience large losses. If so, and should conditions tighten enough, it is possible the Federal Reserve may make a decision to increase rates, yet again. The reader of this article should question, in the event rate increases continue, “can my business absorb the cost of more expensive loans?”.
According to a June article published by Reuters, an international news agency, hotel developers are running out of cash as construction lending dries up. It reports there have been 324 hotel projects nationwide that have either broken ground or are in the pre-construction phase. Of the 324 above referenced projects, 59 have been on hold since March when the banking crisis started. Many developers are either postponing projects or seeking more creative methods of raising capital.
Reuters reports access to loans coupled with the higher cost of construction, have development projects across FL, CA and TX experiencing extended wait times for commercial construction loan approvals and associated construction delays. Analysts have said the slower movement in hotel developments also limits profits of blue-chip manufacturers like Caterpillar Inc., whose commercial real estate customers account for 75% of their construction sales.
One of the largest development firms engaged in the hospital industry stated with regional banks tightening lending standards and making fewer loans many developers are looking to private equity loans. But those rates of 9-10% are more than double than the approximate 4% rate available 2 1/2 years ago.
Politico, a political newspaper company, states the “next big threat hovering over the U.S. Economy” is the more than $20Trillion in the commercial real estate market. 70% of those bank-held commercial loans are with regional and small lenders. Write downs could spell big trouble in the financial system. FDIC Chairman Martin Greenberg held a press conference in May stressing the commercial real estate market poses a significant risk and his Agency is urging lenders to prioritize managing the sector exposure. The Federal Reserve flagged commercial real estate as an area of concern in its May Financial Stability report. It warned “the magnitude of correction in property values could be sizable and therefore lead to credit losses by banks and investors holding commercial real estate debt”.
The good news reported by Fortune is that many sub-sectors of our industry appear to be holding steady in the financing market with industrial and multi-family construction at a lesser risk and commercial office space at the most risk of securing lending. The reader would be wise to ask themselves “what level of financing risk does my current construction involve and should I expand or refocus my areas of speciality?”
To compound lending matter, according to Money (magazine), regulators could raise the capital requirements (the amount of liquid assets regulators require a financial institution to have on hand) for big banks. How might this impact small businesses?
The country’s largest lenders could see a requirement to increase their capital requirements by 20%. While this may accelerate a credit cool-down, it may benefit small business borrowers feeling the impact of a pull-back on lending, stricter loan standards, and borrowing guidelines getting tougher.
The Wall Street Journal believes the 20% capital increase will be focused on the largest lenders with at least $100B in assets or those with significant trade operations or fee generation from wealth management and investment banking services. The Journal believes the increase requirement could be seen as soon as this month.
Smaller regional and community banks may likely hold an asset base under the requirements for the capital increase. These banks have been primary lenders for small businesses although large banks do count small business borrowers as customers. The National Federation of Independent Businesses (NFIB) reported that 14% of small businesses nationwide use large banks and 17% use mid-size financial institutions, both of which are typically within the $100B asset threshold and may potentially be subject to the capital increase requirement.
A Federal Reserve Senior Loan Officer Opinion Survey reflects 48% of banks have tightened credit standards somewhat or considerably during the last 3 months of this year. NFIB Research Center’s, a foundation which researches the critical concerns of the small business owner, most recent month’s survey found that 20% of its respondents reported the inability to access needed funding.
But there does appear to be an upside for small business concerns. According to the Professor of Business Development at the University of Virginia Darden School of Business, research reflects there is greater opportunity for small or community banks to serve the needs of the small business borrower. He states these banks are better equipped for this segment of business.
In the opinion of the USHCA, the small or community banks may be more likely to fall outside the possible 20% capital requirements of the mid to large banks. As community based lending institutions there is a greater ability to get to know your banker and your banker to get to know you. These banks may have the capability to help you qualify for loans or assist you with understanding areas where strengthening your application will provide better possibilities for future approval.
As we struggle through the uncertainty of banking, it would be prudent to look at your basis of business to determine how to best mitigate potential lending issues. On a subcontracting level it would be equally prudent to discuss the funding commitments of your General Contractor or Developer prior to entering into contractual agreements. Public entity work, while encompassing challenges of its own, have historically been a sound and trusted source of project funding. If you have not done so yet, this may be an appropriate time to ask yourself, “Is this an avenue for projects I should explore?”.
The USHCA has two banking institution members. Should you have questions about banking and would like to speak with one of their bankers, please let us know.
Should you wish to view the various studies, surveys and research referenced in this article conducted by the NFIB you may do so at their website NFIB.com