Banks Tighten Up on Business Loans as the Economy Softens

For Chris Lewis, it was a standard request for the kind of deals he has been putting together for more than a decade: a $50-million bank loan to buy a Southern California manufacturing company.

Lewis never expected he’d run into so many closed doors.

“We didn’t think we’d have a problem, but we weren’t able to put the deal together in this economy,” said Lewis, a partner with Riordan, Lewis & Haden, one of Southern California’s leading private investment firms. “The banks have just become more cautious.”

As the economy has slowed, more investors and businesses in Southern California and nationwide are finding banks suddenly less eager to lend than in recent years.

But talk of a credit crunch--a severe cutback in bank lending that affects business borrowers across the board--is overstated, many experts say.

Bigger banks have become more cautious than smaller institutions, some analysts say, and the hefty borrowing requests typical of major companies and of investors seeking to make large deals--like the one Lewis sought--are being evaluated more critically by lenders.

“I think the economic slump forced the banks to tighten standards,” said Peggy Bradshaw, executive vice president of the small business division for Comerica Bank-California. “And when you see the standards tightening, it impacts the larger companies and their credit needs first.”

However, bank credit still is readily available for smaller, stable firms with strong balance sheets and good business prospects, many experts say. Government-guaranteed lending, through the Small Business Administration, also is available.

What’s more, bank credit in general is getting cheaper because of the Federal Reserve’s interest rate cuts.

With last week’s half-point Fed cut, the bank prime lending rate fell to 8%. It was 9.5% at year’s end.

“There’s no real problem at the moment,” said Bill Dunkelberg, chief economist for the National Federation for Independent Businesses, a trade group representing small businesses. “The hurdle may be higher [in terms of tightening loan standards], but we’re getting over it. There may be more care in lending by bigger banks, but that hasn’t trickled down to banks lending to Main Street America yet.”

A Federal Reserve survey released in January showed that nearly 60% of U.S.-based banks tightened standards for commercial and industrial loans to large and mid-market businesses, blaming a weaker economic outlook and reduced tolerance for risk.

But just 45% of banks tightened lending standards to small firms.

Dunkelberg pointed to a monthly survey his trade group does of 600 members that found only 4% were having trouble getting credit in February. That compares with the late 1980s, when credit was the No. 2 problem for businesses after inflation.

“We haven’t seen a credit crunch yet,” he said.

The stakes are particularly high in California, home to a large number of small and mid-size firms that depend heavily on bank loans. With venture capital investments slowing sharply, the “junk” bond market closed to many higher-risk borrowers, and the market for initial public offerings virtually dried up, more companies might begin to feel a money squeeze if banks balk at lending.

Bruce Ackerman, president of the Economic Alliance of the San Fernando Valley, said, “We are still seeing growth, and, if anything, the money is still out there.”

But some industry experts say they’re hearing more concern from companies. Mark Monaghan, president of the Software Council of Southern California, a trade group that represents software companies, said more of his members in recent weeks have become worried about the availability of bank loans.

The shakeout in the tech sector has bankers concerned. Bradshaw, who works in the Silicon Valley, said Comerica is closely following the dot-com shakeout and its fallout.

“If we hear in the valley that XYZ company is going to cut back and we know that one of our borrowers does 20% of their business with them, we start talking to them right away about how they can remedy the situation,” she said.

At Bank of America, spokeswoman Betty Riess said lenders are watching for borrower problems because of the state’s electricity crisis.

“We’ve got money to lend,” she said. “We continue to monitor the impact of the energy situation on our business customers, but so far we haven’t seen anything notable.”

Still, some new data are troubling. Banks nationwide are seeing increasing problems in their commercial-loan portfolios, the Federal Deposit Insurance Corp. said last week.

For now, however, many banks’ response to rising loan problems is simply to limit their exposure to major new loans.

Equity investor Lewis says he will wait until later this year to try the banks again for his $50-million loan, on hopes the economy will improve.

“We’re hopeful,” he said. “Right now, we’re sitting tight.”