Subprime Time

Though not every market player is affected, lenders, investors, individual borrowers, and mergers and acquisitions deals are all feeling the heat of the subprime mortgage crisis. The situation, caused by a spiking default rate in low-quality mortgages and the investment pools they backed, has pushed some mortgage originators out of business. Others are requiring higher credit scores from borrowers. Banks and other financial institutions are finding it harder to borrow money, both in the United States and abroad, and lenders of all sorts are less willing to loan large sums to finance mergers and acquisitions deals.

Will the subprime mortgage mess affect your business banking? It’s hard to know, area sources say, particularly because market conditions are constantly evolving. For clues, however, look to the overall business banking market—and at your bank, your business, and your business plan.

Competition and Caution

The region’s banks have competed fiercely for both depositors and commercial borrowers in recent years, and the fight has yielded great rates and terms for businesses. Bankers say that most banks have money to lend and are still competing to offer the best deals. That means continued low rates and favorable loan terms for businesses with good credit, solid financial statements, and strong prospects.

“The local banking community has lots of dollars to spend, they’re looking for business, and we think rates are competitive. We certainly haven’t adjusted our rates upward,” says Chuck Mueller, executive vice president of Edina-based Fidelity Bank.

For some businesses, though, the subprime mortgage crisis may lead to a change in loan terms. “I’d say right now it’s blowing hot and cold,” says Karen Turnquist, president of Prinsource Capital Companies, LLC, a nontraditional business lender based in Minneapolis.

Some businesses, she says, are taking advantage of banks’ competition with each other and with nontraditional lenders. “We recently got taken out on a deal by a private investor who did a strip of financing in partnership with a bank,” she says. The bank refinanced an existing equipment loan for $200,000 and offered the company $300,000 in additional financing, for a total loan of $500,000—more than double the original loan on the same equipment. “It’s our opinion that the equipment does not support a $500,000 loan,” Turnquist says, particularly as the borrower lost $1 million in 2006 and was on track to lose money again in 2007.

Other businesses pay higher rates when banks opt for a less risky loan portfolio. Turnquist says she’s seeing something she hasn’t seen in a long time: banks not renewing loans or asking clients to find other lenders. “A few years ago, we might have seen the lender being willing to hang in there longer,” Turnquist says. “I think they’re taking a harder look before they work through rough spots.”