With HSBC gone from the north country, the smaller banks that remain may not have enough capital to meet the demand of entrepreneurs and small businesses.
Observers say those seeking loans to launch startups could find themselves at a disadvantage, as the pool of applicants will be dominated by HSBC’s larger clients now doing business at local banks. This summer, five HSBC branches in the north country were taken over by Community Bank and four by First Niagara Bank.
“When the largest bank leaves the area, common sense says to me it’s going to be much more difficult for startups to find funding,” said F. Eric Constance, regional director of the Small Business Development Center in Watertown, which helps startups develop business plans in Jefferson, Lewis and Oswego counties. “It makes it that much more difficult to find loans.”
Of the roughly 800 clients the center works with during a typical year, about 65 percent are small startups. Only about 15 percent of the nonprofit’s clients successfully obtain loans.
As HSBC’s replacements, Community and First Niagara can’t lend close to the same quantity of loans, Mr. Constance said. KeyBank now is the largest financial player in the north country, he said, followed by M&T, Community, Watertown Savings and First Niagara.
Mr. Constance said HSBC’s absence likely will create a longer list of loan requests at all of these banks. In turn, banks will have leverage to be more choosy about which loan candidates they pick. The riskier ones — usually startups — could be left out because of their customarily higher failure rates, or they could face tighter loan criteria requiring higher upfront payments.
A restaurant owner who could get a $200,000 loan three years ago with a 10 percent down payment, for example, now could be forced to put 20 percent to 30 percent down, Mr. Constance predicted. And if a bank doubles the number of clients on its waiting list from 50 to 100, it will be able to cherry-pick the ones with the best business plans and working capital.
“They’ll have lower failure rates because they’ll have more creditworthy people,” Mr. Constance said. “They’ll be able to approve better lending packages” because of the high demand.
Banks already have sparred to win over the pool of small-business clients left in the wake of HSBC’s departure. Watertown Savings Bank has forged new relationships with a handful of businesses and opened 150 new deposit accounts with former HSBC customers, CEO Mark R. Lavarnway said.
HSBC offered loans mainly to higher-end business clients here seeking to finance larger amounts than what competitors usually offer, Mr. Lavarnway said. Some of them have opted to stay with HSBC and conduct business on the Internet, or continue with Community and First Niagara. But there was still a good chunk of former clients up for grabs.
“They’re continuing to handle some of those larger customers even though they don’t have a presence here,” Mr. Lavarnway said. “However, with smaller businesses, we and other banks may have to fill the sweet spot they had with bigger lending. We’ve picked up some new business clients, and I’m sure others did as well.”
Mr. Lavarnway said banks still have money to lend, but higher demand for loans could stiffen lending criteria for small businesses with higher risk.
“We’re certainly not going to turn our backs to what the market’s telling us if there’s high demand,” he said. “But it’s still too early to tell; we’re only five days into this.”
Others contend that as a large corporation, HSBC had only a minor impact on the lending climate here.
“It’s not really going to make a big difference to the commercial businesses here in the north country,” said Michelle D. Pfaff, a commercial lender at Community Bank for 15 years who retired in 2010. “Other banks here still have plenty of capital to take on these small businesses in some way, whether it’s a high-risk loan backed by the (U.S. Small Business Administration) or low-risk loans” for higher amounts.
During her tenure at Community, Mrs. Pfaff said, HSBC was never viewed as a major competitor, because it primarily served larger businesses outside of Community’s lending scope. Lending standards should stay mostly the same at local banks, but criteria could stiffen when it comes to issuing loans for risky ventures.
“Banks are in business to do business, and they might be a little more careful now” with those clients, she said.
Mrs. Pfaff said most small businesses garner loans in which the SBA acts as the guarantor to ensure the banks get paid back if the business fails. Banks “always want to find a way to help startups,” she said, “particularly if they get help from the SBA.”
In the meantime, banks are still vying for business clients that haven’t found a home yet, she said.
“They know who they are and are probably calling on particular customers,” she said. “They all have the same hit list.”