Bankers in Spokane haven’t noticed a sharp change in behavior from prospective borrowers, panicked by the looming threat of rising interest rates set to occur in 2022, but say they are keeping a constant eye on rising rates and anticipating the needs and hurdles of prospective borrowers. 

Josh Melcher, a senior vice president at Spokane Valley-based Numerica Credit Union, says that the interest hikes, which could total 1 full percent by year end, will most likely hurt small businesses. 

Melcher says he has noticed a change in borrowing behaviors to an extent. For example, prospective borrowers who received rate quotes in November are now coming back and wanting to lock in those previous rates.

Projects sometimes take time to come to fruition, and financial institutions usually don’t like to lock in a rate until the loan is signed or documents are produced, explains Melcher.

“Prospective borrowers calculated their payments based off rates from a month ago, but fast-forward to today, the rate they were calculating has gone up quite a bit. Those are not fun conversations,” says Melcher.

The typical bank rate for a small business loan ranges between 2.54% and 7.02% as of Jan. 12, according to NerdWallet, a San Francisco-based financial information company. 

Last month, rates for commercial lending increased between 27 and 33 basis points, Melcher says, adding that for a $100,000 loan, it amounts to a monthly payment increase of roughly $25 to $30, Melcher.

“That’s not huge at this point, but by the end of the year we could be looking at hundreds of dollars,” he says. “We’re doing $1 million to $5 million loan deals, that’s significant payment increases.”

Jack Heath, president and chief operating officer of Spokane-based Washington Trust Bank, says rates have been uncharacteristically low for an extended period of time, and clients have been taking advantage of this low-rate environment by locking in long-term rates.

“It’s a question of how quickly they rise,” Heath says. “We believe in this period of time, rates will increase two to three times, but it will be slower pace than it has been in prior recoveries where you’ve seen a real spike in interest rates.”

In the high-inflation era of the late ’70s, for example, interest rates spiked to as high as 20% from 6.25%, he notes.

Heath says that he doesn’t anticipate a dramatic hike like in previous economic recessions, but more of a gradual normalization.

“We are cautiously optimistic that the interest rate hikes will not slow the activity we’re seeing now and not adversely impact our markets,” he says. 

Heath adds that there is strong demand for U.S. Small Business Administration-backed loans with continued rate relief, including zero-fee loans under $350,000 and a discounted fee for loans over that threshold.

Mike Brunett, SBA and commercial lender for Coeur d’Alene-based Mountain West Bank, which has branches in Spokane and Spokane Valley, also says he hasn’t seen much panic from clients.

“We see the rates on the horizon, but right now we haven’t seen an impact on borrowing demand,” Brunett claims. “Locally, rates are still competitive.”

Melcher, however, has noticed how these small changes already are creating obstacles for small local business owners. He recently worked with a couple who thought they would be able to purchase an owner-occupied building. However, with the slightly increased rates, they realized that for the deal to work, they needed to decrease the amount of the loan or make a larger down payment to reduce monthly costs.

“It’s hard, especially on those small businesses,” he says. “That’s where it really hurts.”

Another obstacle in commercial real estate, he says, is an infusion of cash from outside the region.

“A lot of those applications are for out-of-town investors, usually with 1031 money,” says Melcher, referencing the IRS tax code that allows individuals to avoid paying capital gains tax when selling a property and reinvesting the proceeds into another property of equal or greater value.

In terms of rising rates and heavy-pocketed competition, it creates a scenario in which borrowers might ask for higher loans to beat out the competition.

“It is something we have to account for in underwriting,” Melcher says. “The last thing we want to do is overfinance someone.”