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Your Bank > Education and Advice > CNB University

Business Lending Cycles Akin to Grief Stages

K Goebel
Keith  Goebel is Vice President, Commercial Services and can be reached at KGoebel@CNBank.com or (585) 419-0670 x50641.

Someone once said lending is part art and part science.

Certainly commercial lending employs its fair share of science in the form of analytics, metrics, statistics and more. My days in Psych 101, however, remind me that human application of any science adds variability, hence the artistry.

Now that we are two-plus years into the Great Recession and emotional reaction has been replaced with rational thinking, commercial bankers and business owners can start to understand what caused the current economic state and assess whether it is normal.

Plenty has been written in the last year regarding the causes, but not as much has been stated about the normalcy of the present business environment. Severity and speed of onset vary, but the answer to the question, "Is this normal?" is "yes."

Some recent reading started to blur the lines between art and science and a corollary emerged between the stages of business lending, as seen by the banker and business owner, and the stages of grief. In that context, grief is not a negative reaction, but a normal response to experiences.

There are parallels between the five stages of grieving identified by Elizabeth Kubler-Ross and the stages of business lending. The stages of grief in business are related to loss, which can be loss of customers, earnings or an entire business for an entrepreneur or loss of a loan for a banker.

Initially, denial is the dominant reaction, temporary as it is. Both the entrepreneur and banker rationalize that everything is fine, which rather rapidly is replaced by a heightened awareness of the situation.

In the last 18 months, most commercial bankers and some business owners certainly have experienced that reaction. Denial likely is the most detrimental stage of grief for business, as early detection and action is the strongest defense.

Delayed reaction results in anger, which in the Kubler-Ross model is the second stage. Thoughts surface, such as "Why is this occurring?" Bankers examine underwriting standards, looking for oversights, and business owners look to shift responsibility.

Once the inevitable is realized, the bargaining stage is reached. Bankers assess the adequacy of collateral and the likelihood that the business will survive or resurrect itself, while the business owner uses negotiating tactics to keep the banker "in the game." That phase sometimes is a delay tactic, with the expectation or hope that the situation will get better if there is just a little more time to manage through the crises.

The subsequent stage, which in the Kubler-Ross model is depression, may be considered depression in the lending scenario, but also could be the opposite — jubilation — as the reality becomes apparent, positive or negative. The certainty of the situation and whether loss or no loss is the outcome starts to influence decision making.

Lastly, acceptance is realized. Bankers accept that either no loss will result — obviously the preferable outcome - or that it will. Business owners accept that either their business - and, usually, their livelihood - will continue, or not, and adjust accordingly.

Economic theorists, notably these days Hyman Minsky and Joseph Schumpeter, long have posed overlapping theories for economic instabilities and their effect on bank loans in stages that can be related loosely to the model I've outlined here. Even Schumpeter acknowledges grieving, although that's more on the part of the banker in that credit granting is essential to capitalism, but it is the grantor who most likely grieves if a venture fails.

The lesson learned is that cycles or stages are normal within the capitalist system, even to the present degree. For regular economic activity to continue, financial institutions — particularly community banks — must continue to foster the exchange that facilitates commerce, job creation and recovery.