Navigating the credit crunch
by Joseph SantangeloThe headlines scream about the credit crunch. So, what if you need a home or business loan? It’s certainly tougher now than in the recent past, but if you do qualify, the interest rates are very attractive. Moreover, the lending climate is better in Massachusetts than many other parts of the nation, say local bankers.
Officially, loan officers are open for business and ready to lend money to qualified commercial borrowers and homeowners. That is the message from lenders in Southeastern Massachusetts and on Cape Cod. But who qualifies – and for how much – may be more complex.
Some small business owners report they now must submit more documentation and put up more collateral than they expected. They are often required to have a personal credit score of 700 or more. The bank often wants to talk with the accountant who prepared their financial statements.
Meanwhile, home equity interest rates are nearly as low as they ever have been. But because home values have declined by more than 10 percent in many communities, today’s homeowner generally may borrow up to 80 percent of a residence’s appraised value, when once it might have been as high as 90 percent.
That means a home appraised at $500,000 may support a first mortgage plus a home equity line of credit totaling no more than $400,000. A homeowner with a residence appraised at $800,000, would be limited to $640,000.
Homeowners may need credit scores of 750 or more to borrow the maximum amount at the most advantageous rate.
On the business front
For startup companies or young entrepreneurs with few hard assets, commercial loans may be hard to obtain, if at all.
Nevertheless, lenders say money is widely available to solid businesses – and at near historically low interest rates – from a wide variety of sources.
Not only does this include commercial banks and savings banks, but also credit unions which now provide commercial loans, lines of credit and commercial mortgages.
Established businesses also rely on trade credit, where a supplier agrees to provide goods or services and bill for them later.
Business credit cards serve a similar function, allowing a one-month grace period on purchases; and American Express is selectively rolling out a new Plum Card with a two-month payback period.
Many business owners also rely on a home equity line of credit, borrowing against the equity in their personal residence to help meet short-term cash flow needs. Although home equity is shrinking in most areas, home equity lines of credit are especially attractive, with interest rates as low as 1.01 percent below the prime rate, or 3.99 percent.
“It’s easy to paint with a broad brush, but that does not accurately portray a fair picture,” said Joseph Bator, senior vice president in charge of business banking at Eastern Bank, with branches from Newburyport to South Yarmouth.
“Good businesses never have trouble getting loans. There are always businesses in good times and bad time that are struggling. We look at what we can do to help them. But right now, I don’t think it’s any harder to obtain credit.”
Eastern Bank, in fact, has run an advertising campaign promoting its small business banking services, hired new staff and shown a 12 percent increase in the first four months of 2008 in business lending and deposits.
“Gloom and doom is nonexistent for us, but we’re always cautious,” said Bator.
Others express a positive outlook for small business credit.
“We speak to many small business owners,” said Jeannine Marshall, executive director of the nonprofit Coastal Community Capital of Centerville, which assists small business in obtaining loans. “We have not heard anyone complaining that commercial credit is not available to those that can demonstrate they can support additional debt.”
“However, we are busier than normal, which probably indicates the banks are relying more heavily on credit enhancements, such as the Small Business Administration [backing], which we provide, to mitigate risk and keep capital flowing to small businesses.”
For businesses able to qualify, this may be an opportunity to think about buying the commercial property where it operates.
“Rates are at their lowest in many, many years,” said Marshall. “Now is an excellent time to for a business to purchase real estate, particularly if they have been renting. Owning the real estate a business operates from allows them to leverage future appreciation to borrow capital to grow the business in the future.”
What kind of interest rates can commercial borrowers expect?
Where commercial loans carried rates of about 8 percent last year, borrowers might anticipate a rate about 6 percent this summer.
Business loans often finance the purchase of equipment, the acquisition of a business, as well as buying commercial real estate and automobiles or trucks. The term of loan and the amount of collateral will depend on each particular situation.
On the home front
Interest rates, terms and maximum amounts to be borrowed also will vary, depending on whether the home is a primary residence, second home or condo.
Nevertheless, home equity lines of credit, or HELOCs, are back in vogue. Banks report that twice as many new home equity lines of credit are being approved than a year ago.
“It’s a nice healthy note that consumers are willing to borrow against homes to make an investment,” said Joseph Bartolotta, spokesman for Eastern Bank. “Clearly there is a market for home equity lines of credit.”
Today, home equity credit lines are a low-cost source of capital, although rates on credit lines will fluctuate in the future. Home equity borrowing can help families pay for home improvements or college tuition. A home equity line of credit can also serve as a source of cash for unexpected emergencies.
Financial advisers, however, warn against using home equity for a high-risk venture or on discretionary spending such as a vacation or cruise. If you default, you could lose your home.
Published in Cape Business July/August 2008
Joseph Santangelo Joseph Santangelo has been a statehouse bureau chief, a corporate executive and currently works for the Connecticut Legislature. 
