Opinion: What the high-rate lending environment means to project funding

Andrea Sitzes

Today’s high interest rate environment doesn’t mean business owners have to cancel or delay planned expansions or projects, but it does mean that more, and earlier, planning is likely required to secure funding.

Most banks are still lending, but with liquidity tightening across the industry, gone are the days where the goal was simply to close a deal, any deal. Banks are being strategic, making relationship-based lending decisions rather than transactional ones. And, as you can imagine, this also means that lending decisions may take longer than many businesses have become accustomed to in the past.

Healthy dialogue
Business owners and those looking to do personal banking should start the planning process by arming themselves with the right questions for their financial institutions. And they should be looking for bankers who are, in turn, asking them the right questions.

You should be asking your bank:

• Does the bank have the ability to scale with my business?
• What’s the institution’s risk tolerance?
• Does the bank’s balance sheet allow for additional loan growth?
• What’s the credit culture?
• What do loan packages at the bank look like?

Your bank likely will be asking you:

• Do you have a debt schedule for all contingent liabilities?
• Are you at risk of portfolio repricing?
• Do you have a succession plan for your business?
• What’s your strategy for active vs. passive income?
• Are you maximizing earnings for your business funds?

The answers to some of these questions will inform how the lender will navigate the loan process in this high-rate environment.

Strategy changes
With interest rates staying low for much of the past 15 years, business owners became accustomed to an era of relatively easy credit. But with rates now rising to their highest levels in almost 20 years, these businesses need to be prepared and equipped for a changed lending landscape.

And business owners aren’t the only ones having to change their strategy – so are lenders.  Traditionally, it was common for banks to compete for commercial loans based primarily on rates and terms. That is no longer the reality. As financial advisers, bankers should use their knowledge of the complete relationship with a customer to provide appropriate guidance, helping to not just close the next loan but ensure their business customers are financially healthy and able to deal with different business and economic scenarios.

For example, if your business has a higher risk of portfolio repricing, you can likely expect a slightly higher interest rate on a loan package. This will mean higher loan payments and that will impact your cash flow, so aggressive expansion plans may need to wait.

If you’re a business owner or an individual with plans for growth or expansion, you need a bank that can accommodate your changing financial needs. Scalability ensures that the bank’s services can grow with you, so you need to know if you start the transaction with a bank that you’ll be able to finish your plans with that bank rather than piecemeal future capital needs through more than one institution. If your current bank doesn’t have scalability, you should prepare to change relationships before seeking funding, because while you may have a good relationship, a bank can’t lend you what it doesn’t have.

Business owners should be mandating a higher level of service and a banking partner that understands the economy with vision to assess, plan and pivot together to accomplish business objectives.

Andrea Sitzes is Christian County market executive and vice president for Arvest Bank. She can be reached at asitzes@arvest.com.