Commercial Loans at banks: How profitable are they?
According to the Wall Street Journal, US banks are lending to business again. Loans to commercial and industrial firms rose by 8.5% in the first quarter of 2015. The rate of lending to business is overtaking the rate of residential mortgages for the first time since the 1980s.
According to consultant Stephan D. Simpson, CFA, bank lending for larger businesses is not as significant in the United States as it is in other countries because large businesses have a wide range of alternative sources of funds. However, small business more often rely on bank lending as a crucial source of capital.
Small business loans include commercial mortgages, equipment loans, loans secured by accounts receivable, and loans intended for expansion. Business loans may be short-term bridge loans that businesses require until they find more permanent sources of funding. The residential construction industry has been a major borrower. Many banks loan money for building construction (which are repaid when the building is completed) then loan money to the building purchasers in the form of mortgages.
The profitability of commercial loans for banks has evolved. For the last couple of decades, interest on loans has been much less important as a source of profit for the bank, since commercial interest rates have been held so low the spread is very thin. Banks have been relying more on non-interest income from fees, including fees and charges imposed when they make loans. In that way, loans are an important center of profits for the banks.
Many banks replace commercial lending with commercial leasing operations. Banks make contracts with equipment dealers or other capital asset dealers who pay the bank a fee for every leasing agreement signed and then the banks collect interest on the leases. Using leasing arrangements as a form of commercial lending allows the banks to expand their business lending while leveraging their relationships to other business like equipment dealers.
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