Banking On The Future

Banking On The Future

The economy may not be roaring back, but it’s improving. So how should your business plan its financial moves?

So how is the Minnesota economy really doing? And what should you, as the owner or manager of a small to midsize business, be doing in the current economic climate?

The gross domestic product grew at a rate of 2.3 percent in the United States in the second quarter, according to the Commerce Department. Businesses who responded to the recent TCB quarterly economic indicator study are anticipating modest growth. In the August issue, TCB reported respondents were taking a “steady as she goes” approach to hiring and production levels.

Still, some small and midsize businesses can be excused for thinking not everything’s coming up roses. The agriculture sector, for instance, is experiencing the downside of a crop glut. That’s having an impact on the many Minnesota manufacturers who supply equipment to farmers. On the Iron Range, the global overproduction of iron ore and steel has meant hundreds of layoffs for mining companies, and stresses for firms that supply the mining industry. A strong dollar is making things tough for businesses that sell (or are seeking to sell) outside the United States. And companies that are expanding are often finding it hard to find good hires; meeting workforce needs has been especially challenging for rural manufacturers.

In short, it’s hard to generalize about the savviest business strategies, particularly in a state with a diverse economy. Based on this complicated economic scenario, what should business banking customers consider when they are looking at late 2015 and early 2016 financial transactions? How does the current economy affect business loans, acquisitions and other major financial moves? Here’s what Minnesota bankers—and their small and midsize business customers—are saying.


How the winds are blowing

Though they acknowledge economic headwinds, many Minnesota bankers express optimism about the economy. “Clients have adopted a lean culture,” says Phil Trier, Twin Cities market president for U.S. Bank. “So with revenues really starting to come back, we’ve seen robust activity at the bottom line with profits. They’re comfortable making more capital investments, which makes us notably optimistic. I think everyone feels pretty good about 2015 and going into 2016.”

Laura Oberst, executive vice president and central region group head for commercial banking at Wells Fargo, says that in the past few years, “the lack of confidence slowed down the pace of recovery—that and the apprehensiveness of companies to expand.” She sees more demand this year, though she also notes that “we have had, through this recession, double-digit lending growth in Minnesota and throughout the Midwest.”

Like many bankers, Todd Williams, senior vice president and chief credit officer at Edina-based Fidelity Bank Minnesota, says that the commercial construction sector is particularly strong, as pent-up housing demand and some major projects are keeping his bank’s loan officers busy. (Fidelity Bank’s primary clientele is privately held businesses with annual revenue under $100 million.) The slowdown he sees is in commodities. “That’s affecting some of our wholesalers,” Williams says, as well as manufacturers of ag equipment and suppliers to the mining industry.

Because of factors such as these, not all Minnesota bankers are reporting a general economic buoyancy. Angela O’Neill, Associated Bank’s commercial banking market leader for Minnesota, says that among the business customers her bank works with, “it’s a little sluggish.” (Associated Bank’s largest Minnesota presence is in the metro area, though it also operates elsewhere in the state. O’Neill’s group works with businesses with annual revenue of between $5 million and $100 million.) There are “pockets of industries that are doing well,” O’Neill says, but industries such as agriculture are slower. “Our manufacturing customers are doing OK,” she notes, and trucking companies and construction tend to be doing well. But she adds the post-recession period has been “a mixed bag.”

Here’s one way to summarize Minnesota’s complicated economy: While on the whole state business is generally strong, it’s not as strong as it was just before the recession hit, and some sectors are doing better than others. Todd Senger, Minnesota market president for BMO Harris Bank, says that when bankers compare [business] today to five years ago, “people would welcome more volume, [yet]I do believe that people are upbeat, in terms of what they’re seeing within their base of business.”

So whether you’re buoyant or cautious, there are a number of ways businesses can prepare for what’s ahead.

Forging a sound strategy

  • Add equipment if the business really needs it. Many bankers are seeing business clients borrowing to buy new equipment. That’s not only because companies are expanding, but also because firms are adding more efficient machinery, such as computer-driven cutters and sorters.

  • Lock in rates and manage debt. Companies might want to consider expansion or a new equipment purchase now, because interest rates remain historically low. But bankers expect the Federal Reserve to bump up rates, perhaps as early as this fall.

    “If there’s a business that’s capital-intensive, we certainly want to take a thoughtful approach to how they’re managing their interest rate risk with the capital that they deploy,” U.S. Bank’s Trier says. “If you’re a large company and have a large amount of floating-rate debt and we’re looking at a rising rate environment, it might make sense to hedge some of that and turn that from a floating rate to a fixed rate. If you’re making a large equipment investment in the next six to 12 months, you should understand the options and perhaps lock in a long-term fixed rate.”

    With the prospect of rising interest rates, it’s a good time to look at debt loads and consider how to lessen them—or at least restructure debts to better manage them. “If [businesses] have a lot of working capital—what we call ‘perma-debt,’ permanent debt on their working capital—this might be a good time to look at that,” says Jim Collins, director of commercial banking for Anchor Bank, which has its corporate office in St. Louis Park.

    Collins recommends that businesses talk to their accountants, bankers and other advisors to find ways to restructure that debt and get additional collateral. “That frees up your working capital going into next year,” he says.

  • Remember the recession. “Clients in general have managed their credit very well since the recession,” Fidelity Bank’s Williams says. “A lot of companies have developed liquidity. Now what I think you’re seeing is they want to grow and they’re feeling more confident, so they’re making investments in various projects or technologies.”

    Still, bankers preach against overreach. Since the recession, Anchor Bank’s Collins says, “we’ve found that most business owners have gone back to the basics and really looked at their expense levels and revenues, and tried to right-size their balance sheets.” He’s seeing customers using their lines of credit less and building up cash to be ready “for those events that they’re not necessarily planning on.”

  • Consider an acquisition. BMO Harris Bank’s Senger is by no means alone when he says, “M&A is hot right now. There are a number of companies that we’re talking to that have companies identified that they’d like to acquire.” Bankers are seeing more and more Minnesota companies acquire businesses with weaker balance sheets, and taking on additional product lines from them—mostly small add-ons. It’s a good time for sellers that might have been holding off.

    “Many of our clients are actively looking for [acquisition] targets,” U.S. Bank’s Trier says. With the market getting better and with borrowing rates remaining low, “we’re starting to see more matches come together.”

  • Think about succession. Selling the business is one form of succession. Even with an uneven recovery, owners of companies with stronger balance sheets and ownerships are ready to sell—not only to other businesses, but to their family members and employees. “We’re seeing a lot in terms of ownership transitioning,” Senger notes. “We’re seeing some borrowing occurring as private companies convert to ESOPs [employee stock-ownership plans].” Wells Fargo’s Oberst also has seen a lot of interest in ESOPs: Business owners, she says, “feel good about transferring ownership to people who helped build [their] company.”

  • Review bank services. A simple way to make business banking more economical is by assessing the service options. Are there services that aren’t being used, such as a remote deposit machine? It could be time to shed bank services that the business doesn’t need.

  • Check security. There also might be services that should be added, such as positive pay—an automated fraud detection tool—as a way to sidestep potential fraud. The cyber-attack risk to precious company data, not to mention that of its customers, is “more of a threat than people think,” notes David Reiling, CEO of St. Paul-based Sunrise Banks. If the likes of the federal government, Target and Morgan Stanley can be hacked, “there’s nothing to say that anyone else can’t,” Reiling adds.

    Small businesses that are using online services for their banking should “take great care and diligence not only at looking at their accounts but protecting passwords [and] changing passwords,” Reiling says. In addition to basic measures such as anti-virus protection, systems such as LastPass can make passwords easy to enter, manage and change. Another simple but crucial recommendation: Perform regular security reviews.

The trail ahead

With the combination of optimism and uncertainty that Minnesota businesses of all sizes are facing, bankers say that companies should be in touch with their lenders and advisors to lay out plans for the future. If anything, Associated Banks’ O’Neill says, you should “over-communicate” with financial guides, discussing capital expenditures, potential expansion and succession planning, particularly with the potential rise in interest rates.

And bankers say that their banks want to lend. In the aftermath of the Great Recession, they’re competing for good loan opportunities. “Banks are healthier today,” Oberst says. “There are more banks with more money out there.” Plus, it’s a good time to take out a loan—as long as a company has a good reason to borrow.

“Our world is not free of all trouble, as we [can] see in Greece or in the Middle East,” Reiling observes. And not everything in the United States is running perfectly smoothly. “But from a Minnesota standpoint, things seem to be moving right along,” he adds.

Of course, the economy remains uncertain. Carefully managing debt, borrowing to capture new market opportunities, and planning for the future remain good strategies. But as Fidelity Bank’s Williams advises, with an eye to Minnesota’s winter, “Don’t get ahead of your skis.”

Gene Rebeck is a Duluth-based freelance journalist who writes monthly for Twin Cities Business.