A slowly improving economy in Connecticut is allowing businesses to rely more on their own capital than on business loans, but some bankers hope that improvement will soon translate to faster growth and a greater need for loans.

Banknorth Connecticut, which is part of Portland, Maine-based Banknorth Group, and the Hartford-based Connecticut Business and Industry Association recently teamed up to learn business executives’ opinions on Connecticut’s credit markets. Middletown-based DataCore Partners helped conduct the survey, the results of which were released last week.

Businesses that responded to the survey said the availability of credit across the state is “very good,” but that uncertainty about the economy – including fears of inflation – are prompting them to borrow less, according to a press release from CBIA.

“The majority of respondents (52 percent) rated current credit availability as either good or excellent, the same as last quarter,” according to the survey. “Forty-five percent of respondents rated the lending climate as average or fair this quarter, compared with 41 percent last quarter. Only 3 percent rated it as poor, compared with 6 percent last quarter.”

Banks are eager to lend to credit-worthy businesses, according to Bill Samuelson, director of business and professional banking at Waterbury-based Webster Bank. But although he has seen a bit of an upturn in the market, the slowly improving economy is not yet ripe for a large increase in borrowing, Samuelson said.

“It’s not a heated or frothy market,” he said.

Thirty-three percent of the respondents to CBIA’s survey reported using financing over the last 12 months to meet their credit needs, as opposed to 56 percent last quarter.

‘Sleepy’ Economy

Eugene Shugrue, chief lending officer at New London-based Liberty Bank, has noticed the trend.

“It’s safe to say our customers are not utilizing all their borrowing capacity under their existing lines of credit,” he said.

Connecticut’s economy generally moves slowly and its current state is no exception. Shugrue described it as “sleepy” and “plodding along.” The economy slowed down slightly in the second quarter, although Liberty did not notice much of a drop in loans for new businesses. But while existing businesses are making enough money in the steady economy to use their own capital for any needs, Shugrue said, the economy has been growing too slowly for them to expand their businesses.

“They’re not taking on debt needlessly,” Shugrue said. “They have been very conservative with debt.”

Indeed, respondents to the survey are wary of what will happen to the economy in the near future, according to CBIA’s news release.

“This survey confirms that the economy is indeed on track and that businesses have available credit to expand and continue to grow their companies,” said Peter Gioia, a CBIA economist, in a prepared statement. “But the fear of inflation has many exercising caution.”

Fewer businesses expect the economy to improve or stay the same, according to CBIA’s release. Eighty-eight percent of the respondents said they expect conditions to improve or stay the same, down from 91 percent last quarter. Thirteen percent expected credit conditions to deteriorate – up from 9 percent last quarter.

It is understandable that businesses are being prudent when there is uncertainty, Shugrue said.

“The businesses are probably doing the right things,” he said.

The businesses that responded to the survey expressed concern that conditions six months from now are likely to deteriorate slightly as the Federal Reserve takes action to fight inflation, according to CBIA’s release.

The trend may be taking place across most of Connecticut, but Webster Bank is seeing slightly different results in Waterbury.

“Overall, we have seen a reasonable increase in activity over the course of the last … six months,” Samuelson said.

He is also hopeful that the steadily improving economy will soon translate into expansion for existing businesses and more business loans.

“Now I think we’re into a circumstance where earnings have improved,” he said.

The extended period of time where low interest rates have prevailed also has helped, he said.

There are not many options for banks that want to increase business lending right now, Shugrue said. Businesses are not growing rapidly and have enough capital to operate.

One of the only avenues for increasing business lending is to pursue customers of other banks, he said. Liberty tries to play up the fact that it is local and stable in the face activity like Banknorth Group being purchased by a Canadian bank, Bank of America acquiring FleetBoston Financial and three Connecticut financial institutions merging to form NewAlliance Bank. But that can be difficult, Shugrue said.

“Everyone is very covetous of their customers now,” he said.

Banks also can try to get a larger share of customers’ business, since most companies deal with more than one bank, Shugrue said.

The survey also found that fewer companies are obtaining traditional bank loans to meet their financial needs. Twenty percent of businesses that responded to the survey reported receiving bank loans – less than half of the 46 percent that reported receiving bank loans last quarter.

“Businesses reported going elsewhere for their financing needs, including obtaining private and government-sponsored loans and utilizing stocks and business earnings,” according to the press release.

Fifteen percent of the respondents said they planned to invest money in new plants and equipment, according to the release. Thirteen percent said they would hire more employees. Another 13 percent said they would expand export activities and an additional 13 percent would expand new operations, according to the release. Fourteen percent of businesses said they did not need additional credit, compared with 30 percent last quarter.