There is no free lunch, as they say, and that rule applies to small-business banking as well as other ventures. Lending to small businesses offers the potential of high rewards, but it also carries the danger of high risks. And when more than 73,000 small businesses fail -- as happened over the past two or three years -- even the best-managed small-business banks may suffer.

As of June 30, 1983, for example, Mitsui Manufacturers Bank had non-performing loans that equaled 90% of its total capital, the eighth highest such percentage among banks of its size, according to Federal Deposit Insurance Corp. Manufacturers president Leonard Weil cautions against reading too much into such statistics, however. He points out that just as small businesses suffer most during recessions, they also benefit most from recoveries. To hedge against potential losses during a period of stagnation, small-business lenders must adhere religiously to sound banking practices -- maintaining high liquidity, for example. According to Weil, Manufacturers keeps 34% of its deposits in cash and government securities, compared with the industry average of 15% to 20%.

In the long run, this conservative policy works to the customers' benefit. Manufacturers's strong financial base and high liquidity allowed it to wait out the last recession with its small-business customers, some of whom were in serious difficulty. When the the economy rebounded, the bank was able to employ its large liquid reserves to help these troubled companies regain their footing. Weil expects to see the payoff in sharply higher earnings next year.

"You know, these guys, even the ones we write off, are not numbers to us," he says. "They are people we know. We want them to be healthy, and getting a receiver in isn't the way to health. From experience we know that if a sound company can't pay us this year, they'll pay us next year. Our policy is to let companies recover. Then we'll get ours back."

"It all boils down to management," observes Irene O. Booker, a vice-president at Cates Consulting Analysts Inc. "There are lots of very well-managed $200-million banks out there. What makes a good bank are all the things that make a good business, like sound financial management and filling a niche. Size really has little to do with it."