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This is one of a series of stories on Hastings entrepreneurs that recently appeared in the Hastings Tribune. Thanks to the Tribune for allowing us to share these stories on TheHWord.com!

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Business loans down from economy

By Will Vraspir
(Story Courtesy Hastings Tribune)

Many businesses use loans to fund startup costs or expansions, and local banks remain in a position to be able to lend money as needed.

While area banks still have money to lend, the recession is causing business owners to be more careful, said Bob Morris, president at Heritage Bank.

“Business owners are very cautious about what they are doing,” he said. “For the most part, they’ve got capital improvement needs and expansions on hold until we get farther down the road.”

The recession hasn’t made it more difficult for a business to obtain a loan, he said, but banks have noticed fewer businesses are asking for loans.

Jay Landell, market president at Wells Fargo in Hastings, said his bank also is seeing fewer requests for loans.

“A lot of businesses are sitting on a lot of cash,” he said. “They are saving that money and using cash for smaller things. Expansions are being put off until they feel the economy is back.”

Economic problems may be holding businesses back from asking for loans or additional credit, but area banks apply the same principles to loan applications.

“With us, it doesn’t have to do with the economy right now, it has to do with the individual making the application,” Landell said.

For businesses seeking loans in spite of the economy, Landell said the underwriting process for many banks includes the five Cs: Character, capacity, collateral, capital and condition.

Character refers to the history and reputation of the business or person requesting the loan, he said. Generally, businesses with a history with a bank will have an easier time getting a loan.

Capacity measures the cash flow of a business and the ability to repay a loan, he said. Since the goal is to have the loan repaid in a timely fashion, the amount of money a business generates is important. Collateral is used to provide security to the lender, pledging something of value if the loan isn’t repaid.

Capital is the amount of money being put up by a business for starting or expanding. “We always like to see borrowers have some equity in what they are doing,” Landell said.

Morris said there is more of a risk in new businesses, and a lack of capital is the primary cause for failure. Despite the risk, he said banks are willing to consider new business loans. “If the thought process is sound, then you bet we’re willing to take a look at those,” he said.

Condition is an overview of the entire industry related to the business applying for a loan, Morris said. A business in a floundering industry could be less successful in obtaining a loan.

Landell said the five Cs can change from time to time, but the general philosophy guides banks in deciding whether to approve a business loan. “We look at each request on an individual basis,” he said. “We let each deal stand alone on its merits.”

Area businesses may not have been as affected by the recession as those in coastal states, but Morris said many appear to be waiting. “People are just very cautious and you can see it in the volume of loan demand,” he said. “Demand is down and a lot of it has to do with the economy.”

The volume of business loans hasn’t dropped substantially, but Morris said some current customers are using lines of credit less. No matter the businesses, Morris said area banks have kept money available for loans. In fact, it’s considered essential to the success of a bank.

“We want to make loans,” he said. “That’s what we are in business to do. At the same time, we want to make sure that when we do try to help a business by lending them money that they have every chance of succeeding.”

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