Cash on the table | A down economy may have commercial borrowers worried, but Maine banks still have money to lend
In January, the National Association of Government Guaranteed Lenders asked its 700 members how the turmoil in the financial markets had affected their lending practices. The survey's responses were notable: A full two-thirds of the members who responded said they had tightened their standards for commercial loans guaranteed by the U.S. Small Business Administration.
The response was enough to send shivers down the spine of any prospective commercial borrower.
But here in Maine, many commercial lenders say that despite the financial mess on Wall Street, their banks haven't instituted any formal tightening of credit for their commercial customers. "From where I sit, the credit is as available as it has been for those that qualify," says Geoff Gatis, executive vice president of commercial lending at Bath Savings Institution. "If you qualified six months ago and nothing's changed, you'd qualify today."
Gatis' statement is innocuous enough, but therein lies the rub: Businesses that qualify should be fine. But, what about the businesses that are on the edge?
Gatis says small banks like Bath Savings and other community banks in Maine have avoided the worst of the subprime debacle that many of the country's larger banks are struggling with. As a result, Gatis says his bank is eager to let prospective borrowers know they aren't struggling despite national headlines that may suggest otherwise. "Not only has credit quality not tightened up, but we're probably hitting the pavement as hard as we have to let people know we have money to lend," Gatis says.
That's not to say the turmoil in the financial markets hasn't affected commercial lenders in Maine. Bill Tracy, director of business banking at Gorham Savings Bank, says his bank is still using the same guidelines to approve commercial loans as it did six months ago, but now lenders may take a more careful look at loan proposals and prospective borrowers. "Obviously when the market changes we're careful about the type of loans we're granting and the experience of borrowers," Tracy says. "There are some risks out there that didn't exist six months ago."
Some of those risks include a slowing real estate market, which could impact a loan since business owners often put up their homes as collateral, and increased costs for fuel and electricity, according to Gatis. "The bias is to lend money, but at the end of the day we're lending our depositors' money so we need to be cautious about how the market has changed," he says.
To mitigate some of those risks, commercial lenders turn to federal and state agencies like the U.S. Small Business Administration or the Finance Authority of Maine, or FAME, for guarantees or insurance on commercial loans.
But some lenders admit credit is tighter than before, even in Maine. When asked if it's tougher now for business owners to land commercial loans, David Eldridge, vice president of commercial banking at Machias Savings Bank, doesn't hesitate. "It's not as good as it was six months ago," he says.
Eldridge says banks such as Machias Savings are forced to tighten the screws because federal examiners are scrutinizing the lending portfolios of banks insured by the Federal Deposit Insurance Corp. "Examiners are really taking a harder look at the commercial side of banking, and ahead of that banks are going to tighten up credit standards because we don't want to be criticized for the loans that we book," Eldridge says. "Already on the commercial side of things, banks are already taking a closer look at deals and maybe not approving deals they would have approved six months ago."
The question for prospective borrowers in Maine is whether they have their ducks in a row. Commercial borrowers with a solid credit history and polished business plan may not have to worry about landing a business loan, but those borrowers with dinged up credit or plans for a speculative business — or a business that the lending officer doesn't understand — may have a harder time now than six months ago when chasing business loans. (For more on what makes a good business plan, see "Tips from a lender," page 34.)
"I think what's changed is the definition of what makes a good loan," says Elizabeth Bordowitz, acting CEO of FAME, which insures commercial loans to businesses in Maine.
Looking for loans
Don Kleiner, co-owner of Maine Outdoors, a guide service in Union, has never had much luck with commercial loans. For the past eight years, he's run his business on a home equity line of credit. Putting one's house on the line to run a business may not always be the best idea, but Kleiner says he's fine with the arrangement for now. After all, he says his chances to land a loan now are probably no better than they were a few years ago. "I'm not even entertaining that," Kleiner says.
Kleiner's problem? "I don't think they understand," he says. "I'm a microbusiness by any stretch of the imagination. I don't think they have any place to hang that."'
Maine Outdoors does about $100,000 in sales a year and is a one-man operation. Besides the year-round guide service, Kleiner also does lobbying work for a few outdoor groups. The consulting gig makes up about a third of his business, he says. "It's Maine: We all have six jobs," Kleiner says. "I just have one business that has them all under it."
It's the businesses like Kleiner's — the ones that may have raised a lender's eyebrows a few years ago — that are probably having a tougher time landing a commercial loan these days, says Gatis.
But banks still want to make loans — after all, it's how they make their money. "Banks make money by lending money," Gatis says. "We have a bias to try to find a way to do the loan."
Sometimes that means bringing in reinforcements like the U.S. Small Business Administration to guarantee a business loan, working with FAME to insure a business loan, or calling Coastal Enterprises Inc. in Wiscasset to provide a business with gap financing, or funds beyond what a bank is willing to lend. "You have to be more creative when credit tightens up," says Machias Savings's Eldridge.
Eldridge isn't the only one with organizations like FAME on speed dial. Bordowitz, FAME's CEO, says the agency has received 187 applications to insure commercial loans since July, the beginning of its current fiscal year. During the entire previous fiscal year, FAME received 155 applications. "When the economy is good, lenders have less need of our services," says Bordowitz. "When it's a little tighter is when we're likely to see more banks come to see us."
But Bordowitz admits that she and her colleagues at FAME were expecting a much bigger uptick in business loan applications. In fact, numbers from the SBA actually show a decrease in activity on the commercial lending front. Mike Stamler, a spokesman for the SBA, says while the government agency has seen lenders tighten credit standards, it's also seen reduced demand from borrowers who may not want to start or expand their business during an economic downturn. Since October, the number of commercial loans the SBA has guaranteed has dropped 16% from the same period the year before, Stamler says. The stats may be a reflection of the two trends, but he says lenders "should consider SBA loan support for borrowers that may have qualified for commercial loans last year, but aren't qualifying this year."
"I think banks are working hard and looking for good loans and continuing to make them," Bordowitz says. "But what we hear is it depends on the industry."
Businesses that are heavy energy users may have a harder time getting a loan, she says, because those increased costs put added pressure on a company's ability to remain profitable and pay back a loan. And businesses that are a bit more speculative, like commercial real estate, or those that involve a bit more risk, like a technology company, may be scrutinized to a higher degree.
Ann Yahner, president of Penobscot Bay Media in Camden, says her business has had trouble finding business loans in the state because it's a knowledge-based business that involves more risk than a manufacturer that regularly churns out products and has a clean — and predictable — balance sheet. Lenders have more difficulty getting their heads around the risk of investing in a knowledge-based company like PenBay Media, Yahner says. "It's hard to show projections that don't show a lot of risk."
Silver lining
The current banking environment, however, may offer banks and borrowers opportunities.
Jill Dutton opened The Cheese Iron, a specialty food retail business in Scarborough, 18 months ago. She had some trouble finding a loan, but she says that was primarily because she initially approached large banks. "They didn't want anything to do with us," she says. So they started looking at smaller Maine banks and received a much more welcome response. She chose Bangor Savings Bank because they offered her an attractive rate. Now she's looking to refinance because rates have gone down so much since then. "If you have a strong business plan and are a small business looking for loan, this is a good time to do it," she says.
Eldridge agrees. "The good news is that rates have come down," he says. "So even though it may be difficult to get financing right now at this very moment, at least when you can get it rates are down."
Likewise, Gatis says the current lending environment offers banks new opportunities to begin long-term relationships with customers. Some of Bath Savings' best customers came to the bank during the recession in the early 1990s. At the time, some banks were cutting back their lending and sometimes curtailing lending to certain industries — marinas, for example. Bath Savings, on the other hand, opened its doors to these local businesses. "We have found it is a time of opportunity for community banks to find new relationships."
Those relationships, once made, should last through the ups and downs, Gatis says. If a recession does hit and financial markets are thrown even more into flux, Gatis suggests businesses with good relationships with their lenders will weather the storm well. "Being a community bank is being very close to the customer. Draconian measures are taken only as a very last resort," he says. "You want to find as best you can ways that are mutually beneficial to you and the customer."
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