Practically every business has shared the same goal with financing over the past year: Defend it.
The spread of COVID-19 and the resulting economic interruptions had banks and their customers entering a survival mode. Once that’s less of a question, a new question will replace it: What are businesses actually going to want bank financing for this year?
What banks are already starting to see some of — and what they’re hoping to see more of — is a return to using capital for expanding, investing and acquiring other businesses, said Josephine Savastano, Valley National Bank‘s chief lending officer in New York and New Jersey.
“We expect that, at some point, as the economy stabilizes and starts to grow, we’ll see more (merger & acquisition) activity, in particular,” Savastano said.
Savastano said clients historically used upwards of 50% of the credit available to them, but that has fallen to the low 20s.
As that starts to change, banks are predicting that new capital expenditures will be informed a great deal by the trials and errors of operating a profitable business during a pandemic.
After 2020’s twists and turns — the “most interesting year” of business in M&T Bank‘s Tom Comiskey’s almost two-decade career at his regional bank — bankers aren’t always keen on attaching themselves to predictions.
During a pandemic that no one could have seen coming, Comiskey said some of his clients were using equipment they secured from prior capital investments in ways they never even considered.
‘Pandemic puppy’ factor
Ask bankers what they’re anticipating adding to their loan portfolios, and you’ll hear the usual forecast: Manufacturing, logistics, distribution and health care will be driving demand.
But, then again, you might be surprised to hear where profits are expected to rain like cats and dogs.
Lender Greg Smith of Peapack-Gladstone Bank came up with a new answer: veterinary businesses.
The senior executive vice president and president of commercial banking at the Peapack and Gladstone-based institution said veterinary businesses happen to be among the main industries looking to secure capital for growth today.
“Pet ownership has gone through the roof during COVID — mainly dogs and cats, but we’ve heard the same for other animals, like parakeets, and different types of birds,” he said. “This is driving more business to veterinarians.”
Leaders of big-name pet businesses such as Petco Health and Wellness have noted the national uptick in pet ownership. The country’s households added more than 3.3 million pets last year, according to Petco.
Another factor is the millennial entrepreneurs who have taken a new interest in this as a startup opportunity.
“Young or new veterinarians have seen this rise in business, and they are now considering opening their own practices and are looking for financing,” Smith said.
“We had quite a bit of manufacturing clients during the pandemic that pivoted from their typical products they manufactured to manufacturing (personal protective equipment) to support the needs at the time, to the extent that they had equipment that enabled them to do that,” he said.
But Comiskey was willing to wager that businesses would be looking for future financing based on some pandemic-related trends, such as the staggering investment required today in the area of cybersecurity and information technology infrastructure.
“If you think about the pandemic and working from home, there’s a continued increase in cyberattacks, and there’s not a single company out there doesn’t need to think about the potential negative impact on their business,” he said. “The only way to ward off cybercrimes is to make investments to ensure you have the right processes and systems in place to protect against that.”
Certainly, banks themselves have been pouring resources into that recently, Comiskey said.
Ed Galan, senior vice president and regional director for commercial lending at Provident Bank, said technology is a piece of the puzzle for companies that have started turning their attention from more immediate pandemic concerns to more long-term focuses.
“Companies continue to look for opportunities to drive profit, and tech brings that capacity in one form or another,” he said. “There’s always been opportunities for that in the marketplace, and there will be more.”
Another area companies are investing in that has both near- and long-term relevance is shoring up their supply chains, some of which might translate into financing needs.
Due to the pandemic and other global trade trends, companies saw the flaws in exposing themselves to having supply chains heavily concentrated in one area.
“Many clients have suppliers across the globe, and what they’re trying to do is not keep their supply chain concentrated in one country or one part of the world,” he said. “They’re building redundancies into their supply chain in the event of some other shock to trade or the global economy, so that any potential disruption for them is minimized.”
Companies are willing now to trade off some efficiency for extra resiliency — meaning they’re willing to hold onto excess inventory after being burned by shortages in the past year. That has the potential to tie up a company’s working capital, and fire up credit demand as a result.
Neither Comiskey, Galan nor Savastano could speak to an overwhelming amount of requests for financing just yet as a result of these trends.
When it comes to discussions banks are having with customers, many are still interpreting the impacts of COVID-19 on their cash flow projections and working to determine what their needs might be going forward. They haven’t yet graduated to a normal year’s lending conversations.
Even if some businesses have thrived, Savastano said the struggle isn’t over for all bank customers.
“We’re working closely with those companies to figure out how to help them through and come out the other side of this,” Savastano said.