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Business confidence: Positive feelings about economy compensate for higher loan rates

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Small business owners aren't shying away from taking out loans, despite climbing interest rates, and some New Jersey financial institutions even report upticks in requests and approvals for the past year.

In 2017, the New Jersey Small Business Association approved nearly $870 million in loans through its program between Oct. 1, 2016 and Sept. 30, 2017. According to the association, that was a record-setting year, up 33 percent.

Through April 30, the the agency’s most recent lending report, it has already approved $528.6 million in loans to small businesses – that’s roughly $75 million per month and if that pace continues its lending could surpass $900 million.

So what’s driving this increase? Conventional wisdom would suggest that as interest rates rise small business owners with tighter cash flows shy away from taking out loans. But industry insiders say a growing confidence in the economy seems to be allowing small business owners to believe their financial fortunes will improve enough to take on debt.

“Everything is really driven by consumer confidence, so even if interests are low but there is a lack of consumer confidence and sales are not occurring, it’s really not going to be helpful no matter what you can borrow,” said Mike Carbone, a regional president at TD Bank. “Clearly, the small business owners are feeling more confidence. We’ve seen an increase in demand for loans in the small business sector. It’s been more this year, but it hasn’t been bad in the past.”

TD Bank was a top Small Business Association lender last year, doling out more than $50 million. Through the first seven months of this lending year, it had approved $49.6 million in new SBA loans, almost triple the loan activity of the same span a year earlier.

Patrick Ryan, CEO of First Bank.
Patrick Ryan, CEO of First Bank. - ()

“If you think about the nature of business borrowing, a lot of times it’s a strategic investment,” said Patrick Ryan, CEO of First Bank. “More times than not, when they analyze the investment, the key drive is how much more it’s going to increase revenue and sales. If they think it’s going to have a significant impact it will more than offset the fact that the interest rate they have to get now is a little higher.”

Overall, the U.S. economy has been gaining momentum since 2016, evidenced by all-time highs of some key stock indexes. Then there is also President Trump’s tax reform policy that some say may help business growth. The tax reform legislation included full write-offs for purchasing equipment, which could benefit the small business owners.

A recent survey by National Federation of Independent Business showed confidence at a record-high, driven by reports of improved profits, while April marked the 17th month in a row with “historically high” readings.

“The optimism small businesses owners have about the economy is turning into new job creation, increased wages and benefits, and investment,” said NFIB CEO Juanita Duggan.

The report also found that capital outlay projects increased 3 percent to 61 percent, and that 43 percent of small businesses are spending on new equipment, a 4 percent increase.

“[Small business owners] are more focused on the business climate and the improved confidence in business activity and the impact of the Tax Reform Act, which did actually increase tax benefits for people in the market for equipment,” said John Rath, executive vice president and chief lending officer at Lakeland Bank. “The general consensus is that the rise in rates [is having] no impact on businesses so far as limiting activity.”

But confidence is also relative and some lenders would prefer a faster uptick in loans. A barometer for lending is the commercial and industrial loan growth (or decline), which increased to 2.6 percent through May. That’s a bit less than the 3 percent growth some had forecast.

Richard Spengler, Investors Bank’s executive vice president and chief lending officer.
Richard Spengler, Investors Bank’s executive vice president and chief lending officer.

“In the overall smaller business, we’re not seeing an uptick,” said Investors Bank’s executive vice president and chief lending officer, Richard Spengler. “It doesn’t seem like people are spending a lot of money or investing a lot of money at this point. … I think that some of businesses right now are doing well and they’re not necessarily borrowing. They are investing their own profits.”

Part of the slower growth with small business loans may be tied to memories of the Great Recession, he added. “We see a little bit of that hesitation, some people learned from that,” Spengler said.

As for what may happen in the next few years, it really depends on where the rates are, lenders said.

“My best guess is that rising rates will start to have a dampening effect on the real estate market over the next year or two,” First Bank’s Ryan said. “But, if the economy is still growing at a good pace, consumer confidence is high and business owner confidence is high, I don’t think it’s going to have a significant impact. It will more than offset the fact that the interest rate they have to get now is a little higher.”

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