Over the past decade, many small business owners put off expansions or capital equipment purchases for as long as they could.
Because of the Great Recession and other factors, they preferred instead to forgo debt and squeeze as much as they could from their existing capacity.
In the last year, Grand Rapids-based Mercantile Bank has seen that change, as companies that were unable to hold off any longer came forward with loan requests.
That trend contributed to the bank’s strong lending volumes in the first quarter, when Mercantile originated new loans of $130 million for new and existing commercial borrowers, President Ray Reitsma told MiBiz.
The higher demand for real estate and equipment financing is the biggest change Reitsma’s seen for customers in the market in the past year.
“There was a long, set desire to avoid overleveraging because of some of the challenges of the early part of the decade,” he said. “The business owners we deal with just wanted to get as much as they could out of the assets they had. They’ve gotten to the point now where they’ve absolutely maximized and now it’s time to invest.”
Many banks reporting quarterly results during the last month said they’re seeing strong demand for credit, although business owners still seem to be avoiding debt for as long as they can.
The higher demand has banks competing hard for good borrowers. Reitsma terms the competitive environment right now as “pretty spirited.”
That’s good for business owners who are borrowing, said Ronald Miller, a managing director at BlueWater Partners LLC who works with clients to secure financing.
Four or five years ago, in the immediate aftermath of the recession, a company with a clean balance sheet could expect two or three banks to compete for their loan. Today, they’ll have four or five banks and perhaps more seeking their business, often with more competitive rates and terms such as a longer amortization period or lower personal guarantee than in the past, Miller said.
“A business with a good financial statement will have multiple banks interested in lending them money,” Miller said. “The banks have a lot of capital to lend and it’s pretty competitive. So the business owners have a number of options today to choose from the lender of their choice, really, if their performance has been good and their prospects are good.”
Yet within that environment there persists a conservative view that lenders see in business owners today.
Holland-based Macatawa Bank’s Chief Commercial Banking Officer Matt Hoeksema describes a “very good” lending environment with demand that’s stronger than a few years ago and with banks anxious to lend. However, some business owners, after going through the recession, still prefer to minimize their debt.
Knowing that the next economic downturn likely is closer in the future than the last recession is in the past, some business owners don’t want to get caught with too much debt on their balance sheets if the economy falters.
“Companies are borrowing money again but what’s different than a few years ago is companies are taking a far more cautious approach to their debt structure,” Hoeksema said. “I would say in the whole scheme of things, they are deleveraging.”
Hoeksema cites how Macatawa Bank originated $60.3 million in commercial loans during the first quarter, yet recorded a dip in total commercial loans from the prior quarter as borrowers paid down debt.
“In the debt world, we’re in a shrinking-pie business,” he said. “The environment for new loan originations and production is strong, but it’s also a very competitive environment so you get a lot of payoffs and pay downs there as well. You have a lot of companies doing well and taking a very cautious approach.”
The strong lending market today that bankers describe contrasts with the findings in the Small Business Association of Michigan’s recent entrepreneurial scorecard. The report ranked Michigan 41st nationally for access to commercial and industrial bank lending as of 2015, the most recent year for which data were available.
That’s down significantly from prior years when Michigan ranked “way higher,” according to SBAM President and CEO Rob Fowler. The ranking is based on lending per $1,000 of state GDP.
While there are “always businesses that have a hard time” accessing credit or capital, Fowler believes the latest ranking could have been the result of what Reitsma and Hoeksema describe, namely the reluctance of some owners to take on debt unless absolutely necessary.
“A lot of businesses use credit differently than they did before,” Fowler said. “It’s the post-recession mentality.”
While the U.S. and Michigan economies remain in good shape, and outlooks indicate they will stay that way, many prospective borrowers say their decisions have started to factor in concerns about the future, said Miller of BlueWater Partners. For example, companies involved in the automotive industry are taking note that North American vehicle sales have plateaued and are forecast to drop from historic highs, he said.
In an economic outlook published last week, Comerica Inc. Chief Economist Bob Dye projected North American vehicle sales of 17.2 million units in 2017, down from 17.6 million units last year. Dye predicts a further dip to 16.5 million units in 2018.
Miller said those factors are weiging on the minds of many small business owners.
“There’s still a slight concern about where the economy is going in the next couple of years because we’ve had a good economic run so far since the recession. There’s a concern that there might be a slight pullback here in the next year or two, but it’s uneven,” Miller said. “Some are feeling pretty bullish about their prospects and some are watching pretty carefully before they leverage up very much.”
On the bullish side, more than six out of 10 small and mid-sized business owners in Michigan surveyed this spring by PNC Bank expect higher sales in the next six months, and 93 percent say they feel optimistic about their company’s prospects. That compares with 45 percent a year ago who said they expected higher sales ahead and 85 percent who were optimistic about the future.
Nationally, Comerica projects real GDP growth of 2.2 percent for all of 2017 and 2.8 percent in 2018.