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As we approach the end of a year like no other — one most would soon forget — few have been financially unscathed in the wake of the pandemic. Yet, as West Michigan has proven time and time again when recessions hit, businesses in the region (although battered) weather the respective storms relatively well.
Comparatively, few go into bankruptcy. During the Great Recession, West Michigan loan portfolios held less risk as evidenced by the fact that only 1 of the 14 banks that failed in Michigan at that time was from the area.
I see several contributing reasons accounting for this phenomenon:
West Michigan businesses tend to be more financially conservative when borrowing while discouraging high amounts of leverage to fund growth. In other words, if an area business is going to borrow, perhaps to cover a capital expenditure in the short term, they’re going to do so in a responsible way, confident that collateral, cash from operations and/or projections based on historical performance will cover the loan in an appropriate timeframe. Here, aggressive is typically eschewed in favor of “living within one’s means.” And it works.
Traditionally, there have been fewer banks competing for loans in the area. This has allowed them to be more cautious, selective and take on lower-risk loans. In turn, this dynamic causes businesses to act more responsibly as they look to qualify for financial relief from a smaller pot.
Recently, other banks from outside the region have come in looking to stake their claim. Thus far, although we have seen an increased use of leverage, it has not resulted in increased defaults from higher levels of risk. That could, of course, go back to demand and what was discussed in the previous section. It is, indeed, something to continue to watch.
Strong sense of community
People in this community want to see it succeed. In our all-too-polarized world, there is a culture of those doing things beneficial to the region at large. It is truly remarkable and quite unique. Individuals here want community and economic sustainability.
For that to happen, everyone needs to share a common goal of making good decisions and acting responsibly in business. Being close and tightknit means finding common ground and a modus operandi focused on contributing to the growth of West Michigan as a whole.
Seeing equitable solutions
There also is a willingness in the region to work through business/economic issues outside the court system with companies and the financial community determined to find ways such as M&A to diffuse situations before they get to the point of no return. In other places, people look at bankruptcy as a way to jumpstart and live another day. You simply don’t see as much of that in our region.
U.S. Court Records show, in fact, that establishments in Michigan’s Eastern District on average have been 17% more likely to file for bankruptcy than in the Western District. Instead, here, there is more of a propensity, in times of trouble, for key stakeholders to look internally and externally for potential resources and exit strategies.
This approach to pragmatic problem-solving often includes seeking conversations with investors, bankers, attorneys and other business owners to collaborate to find solutions and avoid the court system (and all that entails).
In turn, this also works to keep the bank and the business owner as “whole” as possible. Once again, a close community means people are more likely to know and help each other — a dynamic that simply cannot be discounted.
The days ahead
Looking forward, can these West Michigan advantages and sound business practices continue to keep the region ahead of the economic and health status curves as the crisis of COVID-19 surges on? Macro environmental forces have caused industries such as dining, entertainment and hospitality to consider shutting their doors for good.
Meanwhile, the need to work remotely has many industries rethinking their office requirements on a permanent basis. Commercial real estate and office furniture may suffer as a result.
Will West Michigan businesses that traditionally have eschewed leverage in deference to funding through operating cash be able to do so moving forward?
The recent growth trends in the area could also play against the traditional loan portfolio in West Michigan. Given that many more banks have entered the market, the competition for loans has driven aggressive policies and potentially higher risk loans. PPP has softened any detrimental economic impact up to this point, and we have yet to what a second stimulus package may do for businesses.
It has been good to see many companies adapt and thrive with foresight into changes that may have a permanent hold on how to conduct business. It’s important that everyone develop a strategy for moving through the rest of 2020 and into 2021.