This article originally appeared in the October 2011 issue of Smart Business Philadelphia magazine.
Recovery from the economic recession has been gradual and has changed the banking environment. The financial industry took a major hit, and the result has been increased regulation, stricter lending policies and a number of mergers and acquisitions that have left the banking landscape forever altered.
After riding out the storm, the financial industry today is cautiously optimistic. While lenders continue to be risk-averse, they are also strengthening their balance sheets by building capital, thereby creating available funds to loan to potential borrowers. Business owners are in a position to take advantage of historically low interest rates and develop relationships with the competitive banks that want to earn their business. Banks are recovering and getting stronger, and that is good news for businesses.
What key challenges are banks facing?
The economies in the United States and overseas are impacting financial institutions and affecting their ability to grant loans to individuals and businesses of all sizes.
Banks are no different than other businesses that have experienced financial hardship during the last few years. We are witnessing a very slow recovery from the recession, and, while the credit environment is improving, financial institutions are still acting conservatively as they adhere to increased regulation.
In addition, some banks have experienced significant credit losses, particularly in residential and commercial real estate, which contributed to the significant financial collapse that occurred in the recent past. There are also additional credit losses resulting from loans that were perhaps too risky or aggressive.
Meanwhile, banks are dealing with a deterioration of collateral values if they have loans or financing that is tied to the value of an asset, particularly in real estate or in capital expenses such as equipment for companies in manufacturing. Because asset values have decreased, financial institutions are faced with more frequent and independent appraisals of those assets.
Revenue growth for financial institutions has also been a challenge, as many banks have reduced the number of loans that they grant and are taking a stricter approach to lending. That results in reduced income from interest. And because of today’s historically low interest rates, banks are not recovering as much through interest income for those loans outstanding.
What major impact do business owners feel from a challenged banking environment?
While there are opportunities for strong businesses to obtain loans, banking industry regulation has led to stricter credit approval processes. So, borrowers might find it more challenging to obtain financing at the levels needed to run or grow their businesses.
But the good news is, with more aggressive competition among banks, financial institutions are actively looking for good customers — business clients that are poised to grow and that need additional credit to make capital investments. With many banks sporting stronger balance sheets, coupled with low interest rates, now is a great time for businesses to take advantage of the current banking environment and the products that financial institutions have to offer.
Will those low interest rates be increasing soon?
We don’t see any signs of interest rates increasing because recovery from the recession has been very slow. By maintaining these historically low interest rates, the goal is to avoid slipping into another recession.
And so far, it’s working. With rates so low, businesses that are in a position to secure financing can really leverage their credit dollars and get more for their money.
What direction can you provide business owners in light of today’s economy and the state of the financing industry?
Business owners should communicate openly and often with their bankers. Share both the good news and the bad. Tell the story — what challenges the business faced, what the business did to overcome those obstacles and what the plan is for the future.
Now more than ever, banks are looking beyond the numbers. So many businesses in all industries experienced losses over the past few years. There’s more to a credit decision today than the balance sheet and operating results, although these are still of significant importance.
Banks that have developed strong relationships with business owners want to maintain those relationships. And this is especially true as financial institutions continue to merge and organizations work to retain their customers.●
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