To Get a Loan or Not Get a Loan – That is the Question in the Age of COVID-19

If you talk to a commercial real estate developer, they will say there is plenty of money out there for the lending and, believe it or not, it is cheap money.

If you talk to a Realtor or homebuilder, they will tell you there is no better time to sell, buy or build a home because interest rates are low, and lenders are lending.

But, by all economic measures, the worldwide pandemic has had an enormously negative impact on the overall economy and employment numbers. It is not a secret that the very existence of thousands of restaurants, hair salons, fitness centers, hotels, airlines, personal services, and tourism businesses have been threatened.

And yet, since the effects of the pandemic began in March, dozens of restaurants have either opened or are moving forward with plans to open in Madison County including Outback at Town Madison, Culvers in Madison, Bark & Barrel Barbecue at Stovehouse, and Jack Brown’s Beer & Burger Joint in downtown Huntsville.

The pandemic hasn’t stopped government contractors and manufacturing plants from expanding. Look at Redline Steel, Moog, Mazda Toyota and Booz Allen Hamilton.

So, what is the truth about banking, lending, and the financial fallout on businesses, small and large across the Tennessee Valley?

Is it, or is it not a good time to start or expand a business right now, especially if you need a bank loan to do so?

“Banks are always lending money for good projects – any kind of project where the owner or borrower has their own money in it and are taking some of the risk, and the bank is taking acceptable risk,” said David Nast, president and CEO of Progress Bank.

“If you have an owner who is a good operator, has been in the business for some time, and have their own money in the bank in support for their company so the bank is not loaning all the money and taking all the risk, then banks are willing to lend money.”

He said there are always certain economic cycles where certain industries are considered higher risk than others and restaurants are already high risk, even during normal times.

“Banks look, in general, at what is going on in the economy and, with the fallout from COVID-19, any new start-up with limited experience and limited equity in the project is going to be tougher to do right now,” Nast said. “On the other hand, a business owner who has been in business a while and has good money in a new project like building a larger company building to expand their business, employees and product/service offerings is always going to offer opportunities more interesting to a bank.”

But it isn’t necessarily just because a customer wants to open a restaurant that puts them under more scrutiny right now.

“Restaurants are clearly struggling, but if you are a big well-known chain that planned three years ago to open in Huntsville, most of those companies are continuing with those plans,” Nast said. “Those companies have the capital, the brand recognition, and the capability to open successfully.

“However, if you are a small Mom and Pop shop whose dream has always been to open a restaurant, I’m not sure this is the ideal time to do that.”

He said other businesses such as hair salons and health spas may find the same resistance from lending institutions because they have so many restrictions on them, including questions about whether clients will be willing to go patron those businesses.

“It doesn’t feel like the right time to put your life savings into a business like that right now,” Nast said.

Sean Kelly, Huntsville market executive for Regions Bank, said the capital is there but there is no one-size-fits-all approach to providing financing.

“Regardless of industry, whether a client is in the commercial office or retail space, the manufacturing space, or other industries, we believe the key to a successful banking relationship is to work collaboratively with clients on ways we can offer insights on cash flow, financial management and other needs to help them through whatever need they are facing,” he said. “At Regions, we take the time to get to know our clients. We talk about their business model, how they are adapting during the pandemic, and what needs and opportunities are ahead for them.

“From there, we work to develop financial solutions that meet their individual needs. We work with clients to determine where the opportunities are and how can we best meet individual needs and work to provide customized solutions where prudent.”

Penny Billings, BancorpSouth president for the Huntsville market, said their business lending practices have changed very little since the pandemic and she is optimistic about starting a new business.

“As always, our lending practices are relative to the type of business, the proposed collateral, and the guarantor strength,” she said. “This has not changed. We are fortunate to be in a community where the economy has continued to be strong and supportive of those businesses that have been adversely impacted.

“Starting a business at any time can be tough, but there are probably some opportunities depending on the type of business you’re interested in starting. With our current environment, it’s the perfect time for savvy entrepreneurs to think outside the box for solutions to fix trending problems they see or maybe even add digital elements to their existing business plans.”

Perhaps one of the points of confusion is that today’s pandemic crisis is too closely compared to the 2008 financial crisis.

“While similar in their disruption of the economy, the two situations are entirely different,” said Nast. “The mood is different. 2008 was an enormous financial crisis and at the time, the mood was terrible because we knew we were in for a protracted recession like we had never seen before, and there was no end in sight.

“Not to minimize the negative impact of today’s crisis on many small businesses, the 2008 crisis prepared us in many ways to be more proactive in helping clients get through it this time. We have been able to react quickly and put strong measures in place locally, and at the state and federal level, to prevent a total collapse like what we saw in 2008.

“When you are in the banking business, you are here to help people live their dreams and be successful, so you hate seeing any business fail, but banks have been much more accommodating than they were then.”

Kelly said Regions set aside a credit provision of $700 million in the second quarter of this year for loan loss reserves.

“We did this as a precaution amid the uncertainty the pandemic has caused. It is important to remember, though, that Regions and banks across the industry remain very well capitalized,” he said. “We have diversified our business, we have lessened risk in our loan book, and we have streamlined our operations and efficiencies, and we are operating from a position of strength.

“We are prepared to serve and support our clients and communities through the pandemic.”

Billings said Payroll Protection Program loans are an extremely important accommodation that eased the pain for a lot of commercial customers.

“BancorpSouth generated more than 15,000 PPP loans with total funding of more than $1.23 billion,” Billings said. “Everyone felt a great sense of pride as our company started funding these loans. Many of our customers said the PPP loans provided the necessary financial relief to help them meet their payroll, preserve jobs, and keep their doors open.

“Small businesses are the lifeblood of our communities; therefore, we’ve been doing everything we can to provide resources and financial relief to help them navigate these challenging times.

Nast agreed PPP helped a lot of businesses.

“At Progress Bank, we are now beginning the forgiveness phase and those loans are being forgiven, so they are not having to pay that money back. It was a nice stimulus that helped a lot of businesses stay open,” he said.

The initial days of the PPP program were challenging for Regions as well, Kelly said.

“Those initial days included a lot of long nights and weekends as we worked through a wave of applications from clients who had never been in need of Small Business Administration financial resources before,” he said. “We cross-trained a significant portion of our workforce from various departments to process applications for this type of financing. In the end, we were able to help 45,000 customers receive $5 billion in loans that saved or supported 600,000 jobs.”

On the residential front, Billings said the right time to buy a home is different for everyone and in every market.

“But the housing market is thriving due to record low mortgage rates and more people working from home during the pandemic,” she said. “A lot of customers are refinancing, buying new homes, or doing home improvements. New home construction is booming right now, and homebuilders are working hard to keep up with demand in our market.”

Furthermore, she said BankcorpSouth has seen an increase in consumer equity lines of credit as people renovate and update their existing homes.

“People have been spending more time at home and working at home to support the control of the virus, and as a result, sales for specific items such as computers, household appliances, and gardening supplies, have risen,” she said.

“Across the nation, commercial construction was impacted by the shelter-in-place orders implemented in the early months of the pandemic, causing many builders to halt their construction plans. However, the industry is forecasted to recover as the economy improves. In Huntsville, we haven’t seen a significant impact. As you can see in our community, large commercial projects are underway.”

Kelly provides some good local context on commercial real estate.

“It is true that commercial real estate, on a national level, is facing a challenge during the pandemic,” he said. “But here in Huntsville, our office-space market is in a good position, even during COVID-19. We’re seeing occupancy rates around 90 to 95 percent. Our business sector here includes a lot of government contractors that lease space in the area. Even with many people working remotely, the leasing activity remains strong. That’s an outlier from much of the rest of the country.

“Our nation was, and still is, facing a tremendous challenge. But the banking industry is well capitalized, and we can serve as part of the solution.”