Although local banks are not changing their lending strategies during a rather heady period of high inflation, many small businesses seem reluctant to access the loan pool, even as a last resort.
“Inflation can be good and bad for borrowers and lenders,” said Michael Nagl, president and CEO of Centennial Lending in Frederick, a credit union service organization that serves nine states.
“We don’t care about the rate going up because we’re booking loans at higher rates,” Nagl said. On the other hand, borrowing money at the start of a period of inflation can be a creditworthy decision for companies, because they are repaying those loans with money that isn’t worth as much.
But make no mistake, inflation affects how banks view specific loans, as the end game is far less clear than in times of low inflation, experts said.
“It affects how we view values,” Nagl said. “This will increase the reimbursement burden for businesses and individuals.”
But after more than two years battling a global pandemic, many small businesses are extremely reluctant to take out loans during these uncertain times, said Sharon King, executive director of the Boulder Small Business Development Center. Some of this may be a consequence of the COVID relief and grant programs, but more so, two years of uncertainty have led directly to another wall of uncertainty.
“The pandemic has hurt many businesses so badly that they are not considering taking out loans at this time,” King said. “They would like to see a lot more cash flow in the form of grants. They don’t even want to talk about loans, even though that’s the only lifeline they have.
For Centennial, lending is pretty much its raison d’être. A credit union servicing organization, Centennial provides services to more than 100 credit unions, enabling them to pool their resources for residential mortgages and high-end commercial projects.
“The trading environment has been quite stable,” Nagl said. Obviously, the refinance market is gone for now, but the period of inflation isn’t stopping lenders from forging ahead, he said.
“I think inflation tends to scare people a bit,” Nagl said. “They want to keep hold of this money”, despite the loss of value of this money.
At Alpine Banks, regional chairman Michael Brown said the period of inflation hasn’t changed the outlook on where the bank can pursue lending, but it puts more emphasis on a company’s creditworthiness. in the future.
“It doesn’t affect what we lend,” said Brown, the current president of the Colorado Bankers Association. “It affects how we view values. This will increase the repayment burden for businesses and individuals.
“A large portion of our portfolio is made up of business and commercial real estate. From a commercial residential perspective, we still do that at a very high level. »
With that, construction loans are also strong, Brown said, although future construction costs appear extremely volatile. “It really forces us and our clients to be very sure that between leverage and equity, there’s enough to close the deal.”
Lenders, for the most part, don’t fear inflation, Brown said, but they do fear that inflation, and the means to combat it, will lead to recession.
“In the big picture: when does the [interest] rate increases affect the overall economy? Is it tipping into some sort of recession? This is the line the Fed is trying to straddle now, and the Fed has scheduled six rate hikes over the course of the year,” Brown said.
On the small business side, all is not bleak, King said.
“The good thing, I think the clientele is coming back. Customers come back and have money to spend,” she said.
But existing small businesses are caught between a rock and a hard place, King said. After two years of cutting costs in every possible way, companies now face a new wave of uncertainty, especially if their customers are willing to pay higher prices.
Bill Jones, who provides financial and CPA advice to SBDCs across the state, said small businesses typically don’t have the margins to absorb large increases in their own supply lines. However, he also noted that the real inflationary problems for small businesses will show up later when existing lines of credit need to be renewed.
And there are also a lot of people who want to start new businesses, which he sees in both SBDCs and his own Boulder CPA firm, Jones said.
“But there are intangibles; it’s not just dollars and cents,” he said. “Personal budgets take a hit, so there is cumulative fatigue. People have less and less emotional bandwidth.
“I’ve been saying it for a long time: people will adapt once they know the rules. For three years, each time they think they have adapted, the target moves again.