With a prime rate that’s been cut six times in the past year, you might expect businesses to be lining up for loans. You’d be wrong. “We’re having one hell of a time getting people to borrow,” said Carl Schatz, chairman and chief executive officer of Encino State Bank. “We’re fighting every inch of the way for loans.” Cheap money, it seems, isn’t worth much when business prospects are muddy and, with an uncertain economic climate, small business owners are reluctant to take on debt, no matter what the cost, local bank executives say. Bankers report that lending, particularly small business lending, is about even with, or somewhat down from, this time last year, in spite of the Fed’s numerous interest rate cuts. But banks are finding another source of added revenues, thanks to the economy: an increase in good, old-fashioned savings deposits. “What I think has happened is people are taking their money out of the market, and it’s flowing back into traditional investments,” said Richard Taylor, president and chief executive officer at Bank of Granada Hills. When the bulls were running in the stock market, many investors pulled their money from traditional savings accounts to take advantage of the upswing. With the downturn, many have taken what’s left of their shirts and put it back into the banks. Encino State Bank has seen its deposits soar 18 percent to $124 million since the beginning of the year, an increase that Schatz, a banking industry veteran, says is astounding. “Most people start paying their real property and income taxes and, as a result, in the first three months you’re dead, and in the next three months you’re dead,” said Schatz, of the traditional lack of investment activity in the first half of the year. “You don’t start growing until August or September.” For Encino State Bank, the increases have not translated into higher net income because of a heavy tax liability. And because the bank has spent large sums on advertising in hopes of attracting more lending business. But borrowing has remained virtually unchanged in spite of the lower interest rates. Some 994 Small Business Administration loans totaling $316 million were made in the Los Angeles district, which includes Orange County and Ventura County through March of this year, a slight change from 978 loans totaling $329 million made for the period last year, said John Tumpak, spokesman for the SBA’s Los Angeles district office. “So you can see the figures are pretty much the same,” Tumpak said. Those seeking loans seem to be motivated more by their business needs than any interest in taking advantage of lower interest rates. And many potential lenders are thinking twice about taking on additional debt in the current economy. “We definitely see a slowing in loan demand,” Taylor said. “I think it’s basically from the standpoint that, because revenues are down, the capital expenditures are down. They’re not putting out a lot of money to boost something they can’t realize immediately because sales aren’t there.” Many community banks like Granada Hills have not had to adjust their lending requirements as a result of the uncertain economy because their criteria had already been fairly stringent. But some of the banks that once aggressively sought borrowers, even with marginal credit, when the economy was good are now pulling back their efforts. “I have seen a difference (in lending criteria),” said Miguel Ju & #225;rez, a loan consultant for the Small Business Development Center of the Valley Economic Development Corp. “Six months ago, a loan would be approved if it had a certain delinquent item on the credit report. About a month ago, the loan was not taken because it had the same delinquent item, even though it had been resolved.” Ju & #225;rez and others at the VEDC, which helps small business owners who might not have “A” credit ratings secure loans, point out that the change is not solely the result of the economic downturn. Some banks disproportionately filled up their portfolios with so-called “B” paper loans when the economy was good and are now less interested in that segment of the business. Still, lenders have put up some red flags as a result of the softer economy. They are scrutinizing business plans more carefully, and they have become particularly averse to financing startups. “The impact is that individuals that don’t have a strong business plan or some level of collateral may find it a very difficult time to borrow money,” said Roberto Barragan, president of the VEDC. “This is not the best time to start up a new business, unless you have a very clear market niche.” Barragan believes that the tightening of lending requirements could actually boost the economy because it gives businesses with good prospects the chance to expand while limiting the potential number of failures. “In an uncertain economy, certain businesses will do well and grow no matter what,” Barragan said. “We want those companies that have an advantage bread-and-butter companies. They’ll be able to mitigate the (economic) impact of those companies who are really caught.” Indeed, bankers too see an opportunity in the current economic climate to build their lending business with companies that are worthwhile risks. “We look at this as an opportunity to gain market share,” said Todd Hollander, senior vice president and division manager for small business lending at Wells Fargo & Co. Wells Fargo entered the small business lending arena during the recession of the 1990s and it designed its policies to protect against the economic climate at the time. With the current downturn, Hollander said, borrowers are out looking for new banking relationships that Wells Fargo can capitalize on without assuming undue risk. The bank is even increasing its lending staff by 15 percent to assist in the effort. “We figured out some ways to make loans that others haven’t,” Hollander said. “We were different to begin with in how we manage risk, so it’s not giving us that much heartburn. But I’d be lying to you if I said it didn’t give us a little heartburn.”
