Credit Where Credit is Due

Why community banks may well be your best source of financing in today's economy.

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Community banks may be your best bet in today's economy

Larry Simon's banking problems wouldn't come as a surprise to many entrepreneurs. Simon is CEO of 11-year-old Interserv Corp., a manufacturer based in Bloomington, Minn., that has sales of more than $2 million. About eight years ago, Simon became convinced that his company would have tremendous growth potential if it could reorient its sales of high-priced equipment away from the semiconductor industry and toward the developing high-definition and flat-screen-display markets. "This business is going to be huge in the future. Interserv could be an IBM one day," Simon says today with a founder's confidence.

But during the mid 1990s Simon discovered that his bankers didn't "get" his capital-intensive growth strategy and, in the short run, were worried about the company's exposure to a semiconductor downturn. "We started out with the attitude that a big bank was a good bank," he recalls. "And when you've got plenty of money and times are good, big banks certainly are happy to do business with you. It's only when you need them to take a chance with you that you realize that's not necessarily the way things will always be."

Bankers are by nature cautious -- which can translate into a reluctance to back younger, risk-taking, growth-preoccupied companies. In uncertain times like the present, that reluctance can intensify into a downright aversion.

Recent messages to entrepreneurs from lenders are still mixed, but warning signs abound. This past February, for example, Heller Financial announced it would not write any new Small Business Administration-backed loans, although the institution previously had been one of the top providers in that market. Around the same time, the Federal Reserve reported that 45% of domestic banks had tightened their standards on loans to small businesses.

Mergers among big banks have compounded the problems. Five megabanks (J.P. Morgan Chase & Co., Citigroup, Bank of America, Credit Suisse Group, and Deutsche Bank) now dominate the nation's corporate-lending scene. That can be bad news for entrepreneurs whose companies don't match the guidelines of formula-bound, bureaucracy-driven large financial institutions. "There are clearly signs of problems," comments Jeffrey S. Levine, a certified public accountant whose firm, Alkon & Levine PC, is based in Newton, Mass. "A client of mine, who owns a very fast-growing temporary-personnel company, suddenly experienced a significant slowdown in payments from a few of his largest customers. Meanwhile, he had a huge payroll that was coming due. So he called me and said, 'I need you to fax over our financials to my bank' -- assuming that it would just increase his credit line, since he had always been such a good customer."

But the bank's response was, It's going to take us a few weeks to decide. Notes Levine, "In an environment like this one, even if a bank is willing to back you, it's going to move slowly and cautiously."

Larry Simon's experience at Interserv was eye-opening. The company had been a model customer at a large bank, with a $250,000 line of credit that it hadn't touched for seven or eight years, according to Simon. But its high-end product line, with each piece of equipment retailing at prices from $650,000 to $3 million, was expensive to produce. So Simon was convinced that he needed as much as $500,000 in credit to finance the company's diversified-growth strategy.

None of the big banks that he approached -- including his longtime lender -- would bite. "My bank was willing to keep us at that quarter-million-dollar limit, but that wasn't enough to accomplish our goals. When I think about the millions of dollars that I ran through that bank over the years through our checking and savings accounts!" he exclaims.

Fortunately, Simon's story has a happy ending. He switched his entire credit line to a young regional business lender, Crown Bank, which was willing to up his limit to the $500,000 he needed. Crown's president, Peter Dahl, explains that a community bank can "look beyond the numbers alone and focus on other issues that are actually very important. Things like a borrower's character. His or her ability to weather a downturn." Dahl adds: "That's why, if we were looking at a company with a longer track record, we might ask more questions about how the business handled the slowdown of '91 than how it performed during a single quarter in '99. With a younger company, we'd be interested in how the company has changed its business plan in the last 12 to 18 months to respond to toughening conditions."

It's ironic. During the boom years of the 1990s, when many large lenders were aggressively pursuing promising entrepreneurial customers, it made sense for fast-growing companies to upgrade their lending relationships. That way, they didn't bump up against credit limits from banks that might be too small to keep up with their accelerated, capital-intensive plans.

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