Uncertainty colors lending climate for banks

While local banks aren’t changing lending strategies during a rather heady time of high inflation, many small businesses appear reluctant  to reach into the loan pool, even as a last resort.

“Inflation can be good and bad for both 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 mind the increase in the rates, because we’re booking loans at higher rates,” Nagl said. On the other hand, borrowing money early in an inflationary period can be a solvent move for businesses, as they are paying back those loans with money that isn’t worth as much.

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But make no mistake, inflation does affect how banks look at specific loans, as the end game is much less clear than in times of low inflation, experts said.

“It does affect how we look at values,” Nagl said. “It’s going to increase the repayment burden on businesses and individuals.”

But following more than two years of dealing with a global pandemic, a great number of small businesses are extremely reluctant to take out loans during such uncertain times, said Sharon King, the executive director of the Boulder Small Business Development Center. Some of that may be a consequence of COVID relief and grant programs, but more so two years of uncertainty has led directly into another wall of uncertainty.

“The pandemic has hurt many businesses so much that they don’t look at taking out loans at this time,” King said. “They would like to see a lot more cash flow coming in as grants. They don’t even want to talk about loans, even if that’s the only lifeline they have.”

For Centennial, lending is pretty much its raison d’etre. A credit union service organization, Centennial provides service to more than 100 credit unions, allowing them to pool resources for both residential mortgages and higher-end commercial projects.

“The commercial environment has been pretty steady,” Nagl said. Obviously the refinance market has gone away for now, but the inflationary period is not stopping lenders from moving forward, he said.

“I think inflation tends to scare people a little bit,” Nagl said. “They want to keep a hold of that cash,” despite that cash losing value.

At Alpine Banks, Regional President Michael Brown said the inflationary period hasn’t changed the outlook on what areas the bank may pursue lending, but it does put an increased focus on how solvent a business may be in the future.

“It doesn’t affect what we’re lending,” said Brown, the current chair of the Colorado Bankers Association. “It does affect how we look at values.  It’s going to increase the repayment burden on businesses and individuals.

“A great deal of our portfolio is commercial and commercial real estate. From the standpoint of commercial residential, we are still doing that on a very high level.”

With that, construction lending is also strong, Brown said, though future construction costs appear to be extremely volatile. “It really forces us, along with our clients, to be very sure between the leverage and the equity, there’s enough to get the deal done.”

Lenders, for the most part, don’t fear inflation, Brown said, but they do fear that inflation, and the means to fight it, might lead to recession.

“In the overall picture: At what point do the [interest] rate increases affect the overall economy? Does it tip over into some sort of recession? That’s the line the Fed is trying to straddle now, and the Fed has penciled in six rate increases over the year,” Brown said.

On the small business side not all is doom and gloom, King said.

“The good thing, I think the customer base is coming back. Customers are coming back and have money to spend,” she said.

But existing small businesses are caught between a rock and hard place, King said. After two years of cutting costs in every way possible, businesses now face another wave of uncertainty, especially whether 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 do not 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 come further down the line when existing lines of credit have to be renewed.

And there’s also a great deal of interest by many people to start new businesses, which he sees both at the SBDCs and his own Boulder CPA business, Jones said.

“But there are some intangibles; it’s not just dollars and cents,” he said. “Personal budgets are taking a hit, so there is a cumulative fatigue. People have less and less emotional bandwidth.

“I’ve said for a long time: People will adapt once they know what the rules are. For three years every time they think they have adapted, the target moves again.”