With the economy showing signs of improvement, we examine the biggest denominators impacting the financial marketplace.
As we enter into the fourth quarter of the fiscal year, some obvious trends have emerged both nationally and in the South Jersey market. Overall, the economy does seem to be improving, however there’s no doubt that small businesses are still practicing cautious optimism.
“The economy is getting incrementally better,” says John Longo, Ph.D., clinical associate professor of finance and economics at Rutgers School of Business. “While investors and individuals are still scarred from the credit crisis, and certainly haven’t forgotten what happened, I do see the economy getting better.”
The key, says Longo, is for businesses to not get too caught up in the negative press. “It’s easy to get lost in the everyday headlines,” he says. “But businesses do need to make some moves to create opportunity for growth.”
Although businesses may be frightened to make moves toward growth, those with their heads stuck in the sand may get left behind. Patrick Ryan, president and CEO of First Bank in Williamstown, says 24 months ago, nobody would even think about investment or growth. But a lot has changed since then—albeit slowly. “Twelve months ago, businesses were at least starting to think about growing again,” Ryan says. “And in the last six months, they actually started talking about it and planning ahead. If the evolution of trends continues as it’s going, by 2014 I believe we’ll be seeing more businesses make investments and aim to grow.”
Chris Warren, senior vice president, commercial executive Central NJ Region, Susquehanna Bank, agrees. “Business owners have gotten tired of waiting on the sidelines, fearing the ‘sky was falling,’” he says. “By nature, entrepreneurs are opportunistic risk takers. With interest rates remaining at historic lows, an increasing number of business owners saw this as an unprecedented opportunity to enter new markets, expand a business line, or acquire a competitor.”
Certainly there have been a number of trends that are influencing South Jersey business decisions and will have a major impact on small businesses as we round out the fourth quarter and look ahead to 2014. According to our experts, five trends in particular have dominated the South Jersey financial marketplace.
The exploration of lending options
With the downturn of the economy, many small businesses found it increasingly difficult to secure loans. In fact, the National Small Business Association (NSBA) recently reported in its 2013 Mid-Year Economic Report that just two-thirds of small businesses (65 percent) report they are able to obtain adequate financing—down from 73 percent six months ago.
The difficulty in securing loans is driving many small businesses to turn toward other opportunities. Businesses are finding other ways to secure the capital they need to grow their venture. “A definite trend has been the continuing growth of alternative lenders,” says Rob Worley, South Jersey market manager for Republic Bank. “Not everyone is getting bank loans these days. Some businesses don’t qualify. So today—particularly in 2013—we’ve seen growth in the number of people who are lending money to private individuals.”
Businesses are also finding greater opportunity with small banks. “Lending is where small banks are excelling,” says Gary A. Farnesi, senior vice president and regional manager of Cape Bank, headquartered in Cape May Courthouse. “There are 10 businesses I’ve lent to that employ an excess of 500 employees but might not be in business if it weren’t for a community bank like ours. The big banks have abandoned the small customer in droves. They’re purely credit score- and ratio-oriented. We can hear the stories that our customers have to tell and have the opportunity to believe in them and we will extend credit in circumstances where a big bank might have written them off.”
New business needs
In the “new economy,” there have been some key aberrations to the normal overall mix of business loan requests, says Worley. Loan requests for replacement, repair and upgrades to operating equipment are becoming much more common. “Many companies have not been able to accumulate enough cash to cover their normal operating capital improvement needs and they cannot put off making upgrades that will keep them in business,” Worley explains. “They are now looking to finance them over the next few years from their future cash flows rather than use cash savings.”
Pam Cyr, chief retail officer at Beneficial Bank, headquartered in Philadelphia, agrees. “Loans for expansion, equipment, improvements and inventory appear to be the main reasons for business owners getting loans,” she says. “Because business is increasing, customers are looking for working capital to leverage new business. Some small businesses are also acquiring similar businesses that could not sustain themselves through recent economic conditions. Things have definitely gotten better for companies that are clearly creditworthy.”
Worley says loans are also being used to move out of the rental market. “The other trend we’re seeing is businesses looking to purchase the buildings they currently occupy or a nearby location—going from rental to ownership,” he says. “Real estate values are beginning to rise and so are rental rates, so many businesses prefer to purchase now versus in the future.”
These days, technology has had an impact on almost every aspect of business so there’s no surprise that it’s impacting financing. From electronic banking to the implementation of mobile app technology and social media, the trend of technology playing a role in the world of finance is one that is not going away.
“Technology has made a huge difference in our case,” says Farnesi. “We’re a loan production office but our main branch is located a fair distance from us—but with technology that’s not a problem. With scanners, businesses are making deposits and doing their checking and banking right from their desk. Mobile banking enables us to provide more service at a better cost because there’s less overhead. That allows us to compete against bigger banks and keep our pricing structures more competitive.”
While many businesses are still wary about the security side of mobile banking technology, as those measures continue to improve, there’s no doubt banking will move steadily in that direction. “Millennials want to live through their smart devices and financial services will certainly begin moving in that direction,” says Rhonda Costello, chief retail officer of Republic Bank.
Like many other businesses, the financial world will also likely be impacted by social media. “I see social media as an emerging trend—maybe not one that’s already well-established for finance but one that is certainly on the horizon,” says Costello. “It can be used as a tool and improve customer service. But before any financial institution ventures in, it’s important to be sure they can do it both safely and effectively.”
New technology has also meant going paperless in the business world. “I think we’re going to save a lot of trees,” says Cyr. “We’re seeing the move toward paperless business across many industries—some are just slower to adopt than others. Here at Beneficial, we’ve launched a paperless process that will change the way we do things. When taking out a loan, the amount of paper you used to have to sign was overwhelming, but now everything is moving to the computer.”
Although the government shut down at the beginning of the month, it did not have any tremendous impact over the business climate in South Jersey. As one government crisis after another has been occurring lately, South Jersey businesspeople are just “getting used to it,” says Worley. “It’s all part of the ‘new normal,’” he says. “People are finding ways to just continue to focus on their business and keep going. We can’t stop every time there’s a new government crisis.”
But Worley says although people are finding ways to carry on, there’s no doubt that the Affordable Care Act will ultimately have a tremendous impact on small business. It’s a big concern and one that may even mean a new way of doing business. “Businesses are very concerned,” Worley says. “It may mean cutting workers’ hours back below 30 hours, and businesses that are on the cusp of the 50-employee mark will likely have second thoughts about bringing on any new employees because the cost of adding just one employee and exceeding that 50-person mark could be a drastic difference. There will be a lot of time spent with financial accountants and lawyers on all the paperwork. But as of now, nobody is even sure if they’re doing it right. It’s a huge area of uncertainty.”
One thing that is quite certain is that businesses will need to prepare for added expense, says Stanley H. Molotsky, president and CEO of The SHM Financial Group. “The cost of Obamacare will mean more spending,” he says. “Whether it’s businesses or upper-income individuals, we’re going to have to pay more. The program may have some great things in it, covering everyone, but we have to be realistic and realize that someone has to pay for that.”
Cyr says she’s heard some businesses say they’re just not going to offer health care anymore. “I think we’re going to see some big changes in business because of Obamacare,” she says. “Doing business is becoming really expensive and I think we’re going to see more companies either not offer health care at all or try to cut back on the number of employees they have.”
Increasing consumer confidence
There’s no doubt the gaming industry has a large impact on the South Jersey economic climate, and most recently that impact has been negative. “The economic engine that A.C. was supposed to represent continues to sputter and is failing to provide the much-needed boost in jobs and economic stimulus,” says Warren.
But some believe it will turn around in the near future. As more businesses recover from the impact of Sandy and the economy seems at least partially on the upswing, it’s hoped that gaming and entertainment will also turn around. They may have been slower than other markets since they represent “discretionary spending,” says Ryan. “The South Jersey market is more in line with hospitality and gaming and I believe that’s poised to better-rebound soon,” he says. “Discretionary economics like entertaining did not rebound very quickly, but I believe we’ll see improvement. I’m optimistic that some of the economic recovery experienced in North and Central Jersey will start to flow to South Jersey.”
There’s no question that the restaurant industry is doing well and that may be a good sign for South Jersey commerce in general. “When you look around on a Friday night, it’s certainly not like the restaurants are empty,” says Costello. “People are eating out and I see that as a good sign that the economy is rebounding. There’s more confidence and therefore more spending.”
In general, consumer confidence has vastly improved and that can have a tremendous impact on the South Jersey marketplace. “Aside from some of the government issues and the shutdown, you are seeing increased consumer confidence,” Costello says. “There has been an increase year over year when it comes to holiday sales and shopping and that’s the expectation for this year, as well. That’s been a good driver for trends and I believe it’s a good sign for the coming year.”
While there has been good indication that things are turning around and businesses are taking the opportunity to make some moves, it’s still important to plan ahead. If businesses have learned anything from the last few years, it’s to tread cautiously. Those businesses that have held on through the financial storm may finally be ready to grow again, but they’re going to do so in smart ways.
Molotsky offers some parting advice: “Whatever it is that you’re participating in, you need to have some form of an exit strategy,” he says. “Think to yourself: ‘What is the way I can get out of what I’m doing?’ People are living longer than ever and they need to plan ahead for that. You need a certain amount of money in reserve because of all the possible contingencies that exist nowadays. Keep a tab on the trends and watch the market, but no matter what, have an exit plan.”
Published (and copyrighted) in South Jersey Biz, Volume 3, Issue 10 (October, 2013).
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