Since the credit crisis of 2008, everyone has been waiting for the banks to start lending money again. It's finally happening, but there's a catch: Businesses are afraid to spend it.
Bank loans to businesses grew 10% last year after dropping 19% in 2009 and 9% in 2010, according to the Federal Reserve. JPMorgan Chase (JPM), Bank of America (BAC) and Wells Fargo (WFC) confirmed the growth in their latest financial results.
But much of the loan growth comes from lines of credit, not traditional loans. And instead of tapping available credit to power up plants, open factories and hire people, businesses are waiting.
At the same time, they are hoarding cash. J.P. Morgan, the nation's largest bank, held a record $200 billion in business deposits at the end of last year, up 35% from the same time a year earlier. Wells Fargo and Bank of America also say deposits from middle-market businesses have soared.
"Our business customers are feeling optimistic," says Perry Pelos, head of commercial banking for Wells Fargo. "But I'm not seeing any boom yet because they are still a little uneasy about the future."
Even successful business owners have found it difficult to adopt the easy confidence of the years before the deep and bruising recession. They want to see more improvement in the economy before they take great risks again.
Jon Schlegel, owner of a Colorado brunch restaurant called Snooze Eatery, says his customers are buying more Bloody Marys and mimosas to go with the popular and more expensive chilaquiles Benedict - his take on eggs Benedict, stacked with steak and tortillas and topped with fresh salsa and cotija cheese.
He's noticed more out-of-town visitors in his restaurants on recent weekends than in the past couple of years. Yet Schlegel is careful about every expense. He pays for supplies and meets payroll with the restaurants' own cash flow rather than borrowing.
"I've got to watch my costs. Meat prices are rising, and coffee prices are going up. If I raise my prices, will people keep coming and can I keep growing?" Schlegel says.
Schlegel's hesitance is common among small and independent businesses that struggled mightily during the Great Recession. For many business owners, it has been an arduous climb back just to survive, and that's made many of them averse to risk.
Analysts are watching bank loan growth closely because it provides clues about whether companies are preparing to hire. Unemployment remains high at 8.3%, though it has fallen from its recession peak of 10%.
Bank loans play a vital role in powering what economists call a virtuous cycle. Banks lend to companies, which spend to open factories to create widgets. Plants mean jobs, which leads to more money in people's pockets to spend. It re-energizes the economy.
Small and midsize businesses depend on bank loans to grow far more than large corporations, which can pay for their plans by selling bonds or stock in the financial markets.
In February, H.J. Heinz Co., the giant food company best known for its ketchup, raised $300 million by selling five-year bonds at an interest rate of just 1.5%. IBM, Procter & Gamble and McDonald's have all raised hundreds of millions of dollars recently by selling bonds and paying record-low interest rates.
For their part, banks say regulations passed since the financial crisis have made it difficult for them to lend because they have to set more cash aside to cushion themselves against future losses.
On a bank's books, a line of credit that a business can tap as needed counts the same as a traditional, lump-sum loan. While they don't break out the numbers, banks say businesses are opening lines of credit but skittish about drawing on them.
In conference calls with analysts and reporters, bank executives have said recently that what they call the loan utilization rate, the percentage of available credit that businesses use, is unusually low. They do not release that number.
For instance, JPMorgan Chase said its loans to middle-market businesses grew 17% in the last three months of 2011, the sixth consecutive quarter of loan growth. But CEO Jamie Dimon warned analysts in January clients were still waiting to use the money.
"It's not utilization. It's new lines of credit for the most part," he said.
The amount of loans to middle-market businesses at Wells Fargo grew 15% in the last three months of 2011 from the same period a year earlier, to about $265 billion. But Wells executives, too, report that not enough of the money is being used.
Most of Chase's customers are like Schlegel: They seem to have enough money to run their businesses. That they are opening lines of credit in large numbers is a sign that they want to be prepared if there is a pickup in in demand.
For Schlegel, demand is just starting to creep back. After the success of his four brunch restaurants, he took out two loans late last year from JPMorgan Chase to open his fifth and sixth restaurants - one in Colorado another in San Diego, his first out of state.
Scouting for new restaurant locations in 2011 proved more difficult than in 2010 and in 2009 because there were fewer spaces available and they were more expensive.
"I guess that's a favorable sign of an improving economy," says Schlegel. "I'm worried about how much we will be able to expand, and how easily I will be able to get my next loan."