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Risky Business

Are dire economic predictions scaring lenders? It depends on who you talk to.
Magazine Contributor
3 min read

This story appears in the February 1999 issue of Entrepreneur. Subscribe »

If you believe the news reports, anticipation of an economic slowdown is making banks a little skittish. Some have even voiced the possibility of tightening their purse strings when it comes to small-business lending.

Although the Asian economic crisis has already motivated some banks to more carefully scrutinize their lending procedures--particularly to high-tech firms--consumer confidence and spending remain relatively high; gross domestic product rates keep rising; and unemployment is still low in most places. With all the conflicting economic signals coming at you, how do you determine your borrowing prospects for the year ahead?

"The risks of lending are much greater than they were six months ago," says James Chessen, chief economist for the American Bankers Association. "There's greater uncertainty about how quickly the economy will grow, particularly in the face of the recessions in Asia and Latin America."

Federal regulators are also concerned about bank underwriting standards and have urged financial institutions to reconsider their lending practices, says Karen Thomas of the Independent Bankers Association of America (IBAA), who adds that competition is spurring some banks to match the generous lending terms offered by others.

According to Chessen, Russia's decision last August not to pay a considerable portion of its foreign debt sent a chill through the international financial community about developing countries' ability to meet foreign debt obligations. Consequently, equity and debt markets worldwide have dried up. "Many businesses that would have gone to the equity and debt markets are now going to banks," he explains. This has precipitated demand for commercial and industrial bank loans.

Contrary to Chessen, who expects the U.S. economy to slow this quarter, Ken Goldstein, an economist with The Conference Board, a business membership and research network in New York City, says discussions of a slowdown are nothing but "scare talk." "Economists are saying things are good but can't last forever," Goldstein says. "Someday, that story is going to have validity, but that day ain't now."

Nor will it be any time soon, Goldstein contends. He says while good growth might become moderate growth by November and interest rates may be a little higher, a recession is not even in the cards until 2001, if it happens at all. (For another point of view, see "Going Down?").

So what does all this mean to you? Loans are available, but expect bankers to ask more questions if you rely on foreign exports or foreign buyers.

"If [those involved in global trade] can make the case that they still have willing buyers, [they] can get loans," says Chessen.

The IBAA's Thomas agrees, adding that small, creditworthy firms won't have to worry about a credit crunch any time soon.

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