Business Lending 

On Oct 28, 2015

While in some ways the overall New Jersey economy has not recovered from the Great Recession (see the New Jersey Economic Update story in this supplement), at the ground level – the bank lending to small business level – the improvement in the last year or two has not only been noticeable, it has, in some ways, been rather dramatic. Banks are enthusiastically working to make loans to businesses, and many small businesses are optimistic and growing fast enough to need them.

Lending to businesses has definitely picked up in New Jersey, says Gerald L. Reeves, CEO and president of Sturdy Savings Bank, and chairman of the New Jersey Bankers Association. One reason is that “banks have more money to lend and are aggressively seeking to put out business loans and looking for opportunities to do so.”

Businesses, for their part, especially small businesses “are thinking of adding employees and doing various upgrades … having fallen behind on a lot of needed upgrades. They were very cautious about the recovery for years … uncertain about its validity. Now, they have renewed confidence in the economy and need to do maintenance they can no longer ignore.”

Interest rates at historic lows have also played a role in business willingness to borrow. “Our business customers are aware of these low rates and we also educate them about them,” Reeves says.

“I’ve been in banking for 35 years,” he continues, “and during this time, rates that usually ran between 6 to 9 percent are now in the 4 to 5 percent range. Provided rates don’t rise too quickly, it might actually be a positive” for our small business lending. That might sound counter-intuitive, but it could spur businesses that might have been waiting, to think that now is the time to take the plunge before rates rise still higher.”

David Hanrahan, president and CEO of Capital Bank of New Jersey, agrees about the pick up in commercial lending in New Jersey. “During most years of the Great Recession,” he reports, “Capital Bank’s loan portfolio still grew significantly. However, those increases were generally at the expense of other banks as we refined existing loans elsewhere and grew our market share. In the last 12 months [through the end of August], however, a greater portion of our loan growth has come from real business activity, including customers’ new equipment, fleets and plant expansions.”

Speaking only of the South Jersey economy, “our customers run the gamut from cyclical to non-cyclical industries, with many in the food business,” Hanrahan says. And since people always have to eat, “these customers tend to borrow consistently.”

The sectors of the economy that have shown the most growth in the last year reflect a far greater degree of confidence. “We’re seeing a lot more loans to contractors, sub-contractors and specialty contractors. In the last year or two, these people have gone from having no work to more work than they can handle,” he says.

Beyond that: “For five or six years, the only construction work came from the medical and education sectors. Now, we are beginning to see it come from a much broader range of industries.”

Credit Worthiness and Economy Sweet Spots

In the depths of the recession, Hanrahan continues, commercial banks needed to be concerned about the credit worthiness of would-be borrowers. “But the number of the small businesses declined. Surviving businesses found ways to cut costs and staff and as a result, they are stronger. The worst of business closures is definitely passed … and I would say that credit standards have normalized,” he says.

The borrowing situation now for these survivors is generally quite favorable, he opines. “There are about 100 banks in New Jersey. Most want to make commercial loans. It’s a very competitive market.”

The New Jersey economy is very diverse. Parts of the state and parts of its diverse economy are definitely still hurting, but there are also a fair number of economic sweet spots that have attracted the attention of bankers.

Small business customers have jobs and are more confident they can keep them, Reeves says. “We’re hiring at our own bank.”

When it comes to the economy’s sweet spots, he goes on, “I can only talk first hand about south and central New Jersey. What we see here is a renewed wave of economic activity … vacation home repairs and new construction in coastal counties such as Ocean and Monmouth. This helps banks for both increased business and home lending.”

Older industries, and those new to New Jersey, are sprouting new offshoots. Reeves offers the example of the wine and beer industry. “There are now wineries and breweries in Cape May (where Sturdy Savings Bank is headquartered) that we’ve never had before. Additionally, I was raised on a farm and I’m seeing more productive use of farmland, the Garden State signature. It’s good for the economy and good for the environment,” he says.

When it comes to renewable energy sources, even with the fading out of generous direct state support for solar power, “we’re absolutely seeing tremendous growth with solar PV (photovoltaic system) installations,” Reeves says. “Many contractors are coming in for loans and many jobs are becoming available for installers. We finance the companies that do the installations.”

While small business lending generally may have picked up in the last year or two, this lending has typically not been directed to still unproven tech innovations.

“That isn’t our bread and butter,” Hanrahan says. “Ventures here are either wildly successful or fail. If a new tech company is wildly successful, our rate of return is still just a low rate of interest on the loan. The downside is the total loan exposure.

“Many banks can’t afford to seek out these businesses,” he concludes.

“Banks have to be right in their lending decisions 99 percent of the time. Frankly, we like boring and predictable companies. Many new tech ventures are better suited to venture capital funding.”

 

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