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Hot – Or Not?
Interest rates may be at a 30-year low — but what's in it for small businesses?
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Business New Haven
10/28/2002
By: Melissa Nicefaro
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This is unquestionably a superb time to borrow money. But many of the benefits individual consumers are reaping do not necessarily hold true for businesses.
Banks, for example are not cheering low interest rates.
“Banks do better when rates are between six and ten percent because you can have a better spread,” says Joseph Ciaburri, chief executive officer of New Haven's Bank of Southern Connecticut.
“Just because your cost of money is lower, you have to compete rate-wise more and therefore your spreads are different,” Ciaburri explains of banks in general.
Low interest rates also typically mean that the economy isn't doing as well.
“Rates are low because the demand is not there. When demand is there, rates go up so the more demand you have, the better the economy does and of course, the better the competition is,” Ciaburri explains.
Money that the bank is investing is only paying about one and one-half percent in interest. In general, banks don't make a lot of money with the rates are low.
“When a CD pays five percent, the economy is in full bloom,” says Ciaburri.
He believes the economy itself is not in bad shape, but terrorism and world conditions have investors fearful.
“I think it's more psychological than it is the economy itself. People are generally afraid.”
The Bank of Southern Connecticut, a merchant bank, opened its first branch on Church Street a year ago and its second branch in Branford earlier this month. It's a different scene than the market Ciaburri launched his first bank.
In 1979 when he started the Bank of New Haven, there were 15 hometown banks in greater New Haven. “Today there's only one and it's a mutual savings bank [New Haven Savings Bank],” notes Ciaburri. “The competition is really not there today.”
“We opened 186 businesses of all sizes, doing from $250,000 a year to $30 million. We're very pleased with the reception the business people have given us. I knew what to expect.”
Greta Johansson, deputy district director for the U.S. Small Business Administration's Connecticut operation, says: “Changes in the economy don't necessarily influence our lending levels. They influence why people are borrowing, but not that they are borrowing.”
The number of refinances versus expansions may vary, but the SBA reports a fairly consistent level of commercial activity.
The SBA guaranteed 1,017 loans to small businesses in fiscal year 2002, which ended September 30. Loans totaled in excess of $188 million, exceeding fiscal year 2001 by more than $20 million.
“We've had some consistently high levels of SBA lending since 1995,” Johansson explains. “We started on a roll and in the last three years one particular lender went 'nuts,' going from doing 50 or 60 loans a year to doing over 400 loans. And that was one of the reasons for the jump in our volume in 2001.”
That lender, Fleet, did roughly 150 fewer SBA loans in Connecticut than in fiscal 2001, but loan totals still broke 1,000.
Plenty of other lenders became more active in 2002, according to Johansson.
“We still have a lot of lenders who do a couple of loans here and there, but we have a few who historically only did two or three did five or six this year. We had different lenders kick in in different places.”
Despite the decline in Fleet originations, the total number of SBA loans dropped by only 53 loans. “Not bad at all, considering three times that [number] was dropped by one lender,” says Johansson. “Fleet was the leading lender in New England last year. Citizens was the leading lender in Connecticut this year by a huge margin. This year, they decided to go nuts.”
On the local front, New Haven's Connecticut Community Investment Corp. (CTCIC) was recognized by the SBA for being the state's top Certified Development Company Lender (CDC) for fiscal 2002. A CDC is a non-profit corporation set up to contribute to the economic development of its community or region.
CDCs work with the SBA and private-sector lenders to provide financing to small businesses. There are about 270 CDCs nationwide, each covering a specific area. CTCIC was the top lender statewide for the SBA's 504 loan program.
The 504 loan is an economic development program that encourages expansion. It's not a lender-of-last-resort program, according to Mark Cousineau, CTCIC's executive director. “It's not a 'Give us your tired, hungry and homeless' loan,” he explains.
CTCIC is also the top “microloan” lender in Connecticut and is six loans away from closing its 200th microloan.
“People are still starting businesses in tough times,” Cousineau says. “We get the mom-and-pops and a lot of start up businesses.”
When interest rates are low, unlike individual consumers who are looking to buy a bigger house or to upgrade because the cost of money is so cheap, small-business borrowers (CTCICs' only clients) are likely to purchase real estate, new machinery, equipment, and the sort only because they need it. Borrowers may build larger than when interest rates are higher if it's new construction, or borrowers may get that additional piece of equipment because the price is so good. But for the most part, business borrowing is nothing like residential borrowing.
That's not to say there aren't excellent opportunities for those looking to start small businesses. Through the SBA 504 program, CTCIC provides up to 90-percent financing.
“That is unheard of in commercial loans,” Cousineau says. “We partner with banks and our piece of the project has been coming in at 6.33 percent fixed for 20 years. Those rates are incredible.”
“Has it helped our business? Yes. But it's been more of a capturing of a little bit of market share rather than an explosion in new business.”
Public policy behind the 504 program is to encourage business expansion, so it's a totally different borrower: a sophisticated borrower who's typically been in business and is now is buying a bigger facility or possibly buying a facility for the first time, according to Cousineau. Since that program provides 90 percent financing, borrowers don't have to put a 20 or 30 percent down on their purchase, allowing the borrower to conserve cash.
“If you are expanding your business into a new building, you're hiring new people, you're buying new machinery, things that don't typically translate into immediate income,” he says. “You are going to need some of that cash to carry yourself through the stress of expansion.”
Under the CTCIC's microloan program is a subset for child-care loans, a specialized loan program by which child-care facilities - whether in-home or at a center - can borrow up to $25,000 to purchase just about anything needed for the business other than real estate or consumables.
“It makes business sense,” Cousineau says. “You shouldn't be borrowing money for operating items that you should be paying out of the money you're bringing in.”
As for trends, Cousineau says there are no hot-selling businesses right now. Every once in a while there will be a new trendy product such as spray booths for tanning. “We do have a constant flow of folks who are looking to open beauty or hair-styling salons, restaurants or landscaping businesses,” he says.
Laying claim to a great success story, Cousineau describes an antiques shop in Stamford that has drawn an enclave of similar shops to the area.
“As a result of our $25,000 silly little microloan, these guys with sweat equity put a lot of improvements into the building and put all the profits back into the business and as a result of their work, there is a whole antiques section in that area of Jefferson Street,” he explains.
All in all and as far as business owners go, rates are a great enhancement, but even if rates double, they still need that building or piece of equipment. Low rates are simply an added bonus, not incentive to borrow.
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