Business loans are always good business

Inflation has reached an all-time high, the Federal Reserve has raised its benchmark interest rate by 2.5% in six months and rumors of a recession are in the air. Yet corporate appetite for debt did not wane in the second quarter.

Despite continued high inflation and dramatic jumps in interest rates, local lenders saw strong loan growth in the second quarter.

Recent studies suggest that many business leaders remain optimistic about the growth potential of their business. As businesses continue to seek loans, the rapid pace of changing economic conditions has added to the challenges facing potential borrowers.

“Most people in business don’t like it when there’s a lot of uncertainty,” said Brian Bullock, executive vice president and head of commercial lending at Lowell-based Enterprise Bank. “It makes people stop for a minute and say, ‘What does that mean? Should I buy this equipment? Should I buy this property? »

Companies optimistic about their outlook

Business activity both nationally and in Massachusetts remained healthy in the second quarter despite declining from previous quarters, Citizens Bank found in its Second Quarter Citizens Business Conditions Index.

“We see several cross-currents in the environment,” Eric Merlis, managing director of Global Markets at Citizens, said in a statement announcing the results. “Levels of concern are high, but the individual outlook is still good.”

The CBCI fell from 59.5 in the first quarter – a record since Citizens launched the index in 2014 – to 52.9 in the second quarter. In Massachusetts, the index fell from 57.5 to 52.9.

Citizens Bank uses public information and proprietary company data to create the index measuring business conditions. An index value above 50 indicates positive business activity for the next quarter.

The change in business conditions from the first quarter could point to the economy returning to a more sustainable level, Citizens said in the statement, or conditions that could soon worsen.

“Businesses are still growing and maintaining positive momentum, and consumers are showing resilience,” Merlis said. “We see the markets trying to calibrate expectations with these conflicting signals.”

A JPMorgan Chase survey found mixed signals among middle-market business leaders, who mostly held a negative view of the economy while remaining confident about their own businesses.

JPMorgan Chase’s 2022 Business Leaders Outlook Pulse survey, conducted between May 25 and June 10, found that only 19% of midsize business leaders were optimistic about the year ahead for the national economy. , while 71% were optimistic about their company’s performance. Last year, 88% had an optimistic view of the economy and 82 were optimistic about their company’s performance.

All respondents said they faced business challenges, including higher cost of doing business and labor issues.

Rick MacDonald, regional head of corporate banking for JPMorgan in New England, excluding Connecticut, said while midsize business leaders have struggled with supply chains and researching ’employed since last year, inflation has not yet set in.

“The new element is this: now it’s all costing me a lot more money, and so not only am I struggling to find qualified people, but now I have to pay more to retain the people I have” , MacDonald said of the problems faced by the companies. leaders. “Now my supply is starting to flow, but it’s much more expensive than before, and now I have to continually look for ways to adjust my prices.”

Surveys of mid-sized business executives show pessimism about the economy as a whole and optimism about the prospects for individual businesses.

Loan offers are still there

Despite the uncertainties, commercial lending has remained strong, MacDonald said, with companies finding lenders willing to compete on interest rates as they seek deals.

“In this environment where there are fewer transactions to consider, that makes it even a bit more competitive,” MacDonald said. “Rates are going up for sure, but if you want to do something strategic, a few points of interest are probably not going to make or break that decision.”

While some businesses still have plenty of working capital, rising costs linked to inflation have also increased some businesses’ borrowing needs over the past six months, MacDonald said.

Not all loan deals bring in new business, MacDonald said. The use of revolving credit lines has started to increase after hitting low levels for much of the pandemic, he added.

Mark Ruggiero, chief financial officer of Rockland Trust, said on the bank’s second-quarter earnings call that line usage increased among the bank’s customers in the quarter, although it remained lower. to pre-pandemic levels. Much of the bank’s commercial loan production in the second quarter came from industries, such as construction, that use lines of credit, Ruggiero said recent lending activity could be supportive of increased use of credit lines. lines in the future.

Real estate loan a bright spot

Like other Massachusetts-based stock banks that had reported second-quarter earnings at press time, Rockland Trust saw loan growth in the quarter.

Ruggiero said the bank continues to see lending opportunities in commercial real estate and construction activities, particularly for one- to four-family buildings, condominiums and large apartment buildings. He added that the retail industry has been a continuous source of commercial and industrial loan agreements.

Enterprise Bank, which also saw loan growth in the second quarter, continues to see demand for loans as companies look to invest in their businesses, said Bullock, the bank’s director of commercial loans.

Diane McLaughlin

Lending opportunities have included apartment buildings as rising mortgage rates exclude some potential buyers and keep them in rental housing, Bullock said. Other lending opportunities have included flexible warehouse space, particularly for e-commerce businesses, and property conversions aimed at life sciences companies.

As borrowers remain active, Bullock said, the rapid pace of rate increases has caused some clients to pause and think about the challenges they may face. Particularly with commercial real estate transactions, rising rates could affect how borrowers measure their estimated return on investment property and raise questions about what to do if appraisals, environmental reports and other factors extend the window for closing a deal.

“Nobody likes uncertainty,” Bullock said. “When rates move, it’s hard for borrowers to project or prepare a pro forma if they’re buying property or looking to buy equipment and understanding, ‘What does it mean if the rates continue to change, and I don’t close for 60 days? »

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