Step To The Head Of The Line

Suddenly, banking has become competitive. And bankers see small business as the most profitable kind of business.

Tweet

America's banks want small business customers more than ever. But that's not necessarily a compliment to small businesses. Banks see them as easy marks. They're particularly fond of firms that leave bundles of cash sitting in checking or 5 1/4% savings accounts -- cash on which the banks earn 15% to 20%.

In the 1960s and 1970s, America's money-center banks and large regional banks couldn't be bothered with small companies. Why fuss with $50,000 loans when you can swing $50-million corporate deals for the same trouble or when you can syndicate loans in the hundreds of millions of dollars to foreign institutions and governments?

In the mid-1970s, though, that game started to change. Larger corporations learned how to sell commercial paper, by-passing the banks and eliminating their middleman's markup. When interest rates started climbing in the late 1970s, these corporations also grabbed back valuable dollar balances that they had let sit in checking accounts, investing them instead in repurchase agreements and other high-yielding investments, even if the money was available only as long as overnight. Also foreign banks, more lightly regulated and more highly leveraged than ours, began usurping U.S. strongholds by lending Eurodollars to multinational corporations at rates that U.S. banks couldn't match. Compared with that abuse, this country's vast ranks of small companies reward their bankers generously.

So now small businesses find themselves the center of attention. Jerome L. Roderick, director of the domestic lending division for Robert Morris Associates, a national organization of commercial loan officers, sums up the bankers' dilemma: "Ten years ago, a banker would sit back and wait for customers to come in the door. Now he has to go out and compete."

Mellon Bank in Pittsburgh, for example, has joined the fray. Only two years ago Mellon wasn't paying much attention to small business, according to Craig G. Ford, senior vice-president in charge of community banking. Mellon is a major international player and is this country's 16th largest bank by assets, but it also operates 110 branches in the six counties where Pennsylvania law allows it. Now it has formed a new division to pursue small companies in this territory.

Mellon has designated five officers at its headquarters to specialize in small business loan structuring and credit analysis. They help out whenever a branch lending officer runs into a small business loan application too puzzling to handle alone. "If you can generate the volume, you can allocate some specialists into the field," Ford says.

Even though the attention may be a lefthanded compliment, this new fad among bankers has meant some good news for small borrowers. Among the shifts occurring in the industry:

* Small firms are getting relatively better rates. That's perhaps hard to believe when the prime tops 20%. But they seem to be paying less of a premium over prime than they used to.

* Banks are abandoning short-term, roll-over credits in favor of longer-term commitments to their good customers. That allows borrowers to count on a line of credit for five or more years, without worrying that it could disappear at a loan committee's whim. What used to be short-term seasonal loans become medium-term working capital financing.

* For the first time, banks are designing cash management products and other electronic services specifically for small firms.Eventually, the advances in this field will bring to small companies the same savvy techniques that the large companies already use with such success.

In theory, stiffer competition drives down prices. The average price for borrowing money, of course, hasn't fallen during the past few years. But small business may be getting better rates than it used to compared to big business. Nobody says for sure, though, because interest rates alone don't necessarily mean anything. Compensating balance requirements make effective interest rates higher than what loan contracts state. And then there's the hubbub over whether prime rates are really prime: Some banks treat them just as bargaining chips in negotiating loans with large companies rather than as base lending rates.

Keeping in mind those caveats, the spread that small firms pay over prime has narrowed or even disappeared. Five years ago, according to Federal Reserve Board figures, loans of less than $100,000 commanded a couple of percentage points more than loans of $1 million and up. Today, according to the same statistics, the differential is nil. And that isn't just a figment of some federal statistician's imagination. Borrowers have noticed the change. In a survey of almost 1,000 INC. subscribers conducted last winter, small firms said their latest loan was, on average, within one-half point of prime.

"For middle-market companies, the cost of credit has decreased compared to large corporations," says Richard S. Bibler, executive vice-president of First Wisconsin National Bank of Milwaukee. "The risk premium has decreased. Where the premium for small corporations may have been three points above prime, now it's one point. The small business borrower may really be getting a bargain now."

 1 | 2 | 3 | 4  NEXT