Regulators recently shared their concerns over the recent trends in the banking industry. An increasing number of banks are choosing to loosen their terms on loans to attract more businesses.
But this is good news for business, right? Regulators say this development actually raises red flags. Lenders are giving corporate borrowers lower rates and looser terms, even if they operate in riskier industries. While this might help companies in the short-term that need to borrow quickly and cheaply in a good economy, regulators caution that rising interest rates will make it difficult for these businesses to pay off the loans down the road.
A recent report by the Office of the Comptroller of the Currency (OCC) identified the easing of commercial loan standards as a top risk in the industry. Even though the rate of bad business loans remains low, the OCC has increased the number of privately issued warnings over the past year. They continue to caution and order financial institutions to modify their business-lending practices.
Following the financial crisis, banks significantly tightened their lending standards. Their focus shifted to offering loans that involved less risk. For example, business loans secured by a business’ inventory or energy reserves; this ensured that the bank would be paid back in the event of bankruptcy.
This continued until late 2016, when banks noticed that commercial-loan growth had slowed for (still) unknown reasons. The annual growth rate was 1.3% at the end of 2017 – down from 12% just three years prior. Eager to boost profits, banks began loosening their standards to further attract businesses and fuel loan growth.
Their main method of increasing loan growth has been to extend interest-only periods, so borrowers can draw down bigger portions of the value of collateral. The Federal Reserve also revealed that banks are relaxing certain agreements that would protect them from losses. Some banks are even choosing to lower rates over the cost of funds.
Comptroller of the Currency Joseph Otting warns that “The worst loans are often made in the best of times.”
Where to Find Fast, Flexible Business Funding
Does your business need fast and flexible business funding options? For some businesses, working with their local bank is simply not an option. For others, they seek to find a cash solution that works for their business, not against it. For example, a merchant cash advance or business line of credit works for your business by providing quick cash and a flexible repayment process. Your business secures the cash it needs in as little as 24 hours, and you can take advantage of an easy collections process that supports your business’ growth.
If you need business funding for day-to-day expenses or to fund plans for expansion, don’t forget to consider the many benefits of working with alternative lenders. Avoid the confusion of traditional bank requirements and secure the cash you need fast through a simple, hassle-free application process.
Author Bio: As an account executive, Michael Hollis has funded millions by using business lines of credit. His experience and extensive knowledge of the industry has made him a business lines of credit expert at First American Merchant.