Getting a bank loan is a lot easier today--that is, of course if you're not a small business owner.
Commercial lending to businesses by banks is rising at a rate that far outpaces the loans they’re making for mortgages and home equity lines of credit, but you wouldn’t necessarily know that from speaking to some of the smallest businesses in the U.S.
Earlier this year, Michelle Balducci-Connelly, a sole proprietor and owner of Michelle Marie Photograpie in St. Louis, contacted half-a-dozen community and larger banks in the area hoping to secure a loan to expand her business. But the extensive paperwork, requiring years of financial data on the business, not to mention the high interest rates, were a turnoff.
“The rates were horrendous, between 11 percent and 14 percent,” Balducci-Connelly, who started the business in 2012, says.
In the end, she settled on a personal loan for $9,000 from U.S. Bank, with a rate of 8.4 percent, which she used to purchase a 1971 Volkswagen microbus that she converted into a mobile photo studio she could use to provide additional services, at weddings and other events. The loan will allow her to grow her business revenue 25 percent in the next year, she predicts.
Yet bank lending for commercial loans is setting new records. It’s nearly outpacing mortgage lending for the first time since the 1980s, the Wall Street Journal reports, and it accounts for 21 percent of all outstanding loans from banks. That's the highest level in 13 years.
This news comes against a backdrop, where small business owners are, generally speaking, finding it harder to get loans under $1 million from banks--and more specifically to find loans of less than $50,000. Over the last two decades, such loans as a percentage of total bank commercial loans, have dropped to 30 percent of bank portfolios from 50 percent in 1995, according to recent research compiled by former Small Business Administration head Karen Mills and Harvard University.
Net income at banks increased nearly 7 percent to $39.8 billion in the first quarter of 2015 compared to the same time period in 2014, the Federal Deposit Insurance Corp. reported last week. Commercial and industrial loans to businesses increased 1.9 percent in the first three months to $32.4 billion. By contrast, over the same period, residential mortgage loans rose a scant 0.7 percent, or $13.2 billion. Home equity lines of credit fell by 1.7 percent, or $8.4 billion.
And there are some potentially troubling signs. As lending to businesses increases, the percentage of overdue loans is increasing, even as the total rate of non-current loans has been going down. Non-current commercial loans, defined as 90 days or more overdue, rose 11.7 percent to nearly $1 billion. in the quarter, while they fell six percent, or nearly $10 billion in the quarter for all loans. (The FDIC says the delinquency rate for commercial loans is nevertheless the lowest it’s been in 31 years.)
The biggest demand for commercial loans, as far as U.S. Bank is concerned, is primarily for middle market firms looking for loans of up to $1 million or more, and on the lower end for $250,000 or less, says John Elmore, vice chairman of consumer banking for U.S. Bank.
“The middle market is where we are seeing the strongest borrowing at this point,” Elmore says. “It is indicative of a much stronger comfort level for that group in replacing capital items, and some expansion, because their business is growing.”
Yet for Jill Foucre, the owner and founder of Marcel’s Culinary Experience, a cooking class, cookware and specialty food retailer in Glen Ellyn, Illinois, a small business loan was just too taxing. It was actually faster to take out a home-equity loan from her community bank, which she used to purchase an adjacent building to expand her business, than it was to go through the extended process of getting a commercial loan.
Foucre has 20 part-time workers and her business has about $1.3 million in annual sales.
Foucre says she was able to get a $475,000 home-equity line in a matter of weeks to purchase a 950 square-foot space she plans to turn into a specialty cheese and charcuterie shop. When renovation is done on the building and the store opens for business this fall, Foucre plans to convert the loan into a standard commercial loan.
In 2011, Foucre obtained a commercial mortgage for $725,000 from the same bank to purchase the building that houses her current store. She says she was able to get such a sizable loan because she wrote a really good business plan and had a good relationship with her banker. She also had personal assets she could use as collateral.
“Now I have a very visible and successful business, and that is helpful,” Foucre says of her home-equity loan.