SOUTHERN CALIFORNIA ENTERPRISE : Taking Account of the Little Guys : Banks Boast of a New Emphasis on Loans to Entrepreneurs

Earlier this month, Bank of America trumpeted a loan it had awarded, the first of its kind in the country. It was not a megabucks deal for international corporate expansion, but a $51,000 start-up loan under a new federally backed loan program to the owners of Loubara’s, an 18-table restaurant in San Diego.

A few days later, Wells Fargo publicly declared its intention to lend $550 million this year to small businesses in Los Angeles. And in a few months, First Interstate Bank vows, that bank will unveil new programs designed to give small businesses easier access to credit.

This horn tooting by big banks about tiny loans reflects a new banking landscape, one in which giant lenders--belatedly, according to critics--are scrambling to prosper in a fast-changing economy in which small business is no longer small stuff.

Loans of less than $1 million made up nearly a third of the $11.3 billion in loans outstanding from banks to commercial and industrial companies in California, according to June, 1994, figures from the Federal Deposit Insurance Corp. Those loans generate up to 20% of net bank earnings, bank officials say.

Of that total, six of the state’s largest banks--Bank of America, Wells Fargo, First Interstate, Union, Sanwa and Bank of California--logged more than half of all the small-business loans in California.

Many owners of small businesses remain highly skeptical that the big banks are sincere, however, and complain that it is no easier to do business with them now than it ever was. Though available statistics are undependable, by some measures their lending to small business actually declined nationwide from 1993 to 1994.

But analysts say the long-term direction is up-- because such loans are profitable.

“The growth market right now is entrepreneurship,” said Eugene Valdez, owner of Claremont Advisory Co., a San Gabriel Valley small-business advisory firm. “The banks may talk about social responsibility, but in reality it’s a profit opportunity.”

For the most part, big banks abandoned small businesses during the 1980s in favor of retail, international and corporate banking. The net effect was that large banks lost ground to community banks, said Terri Dial, an executive vice president at Wells Fargo.

But the evidence is that the big banks are back.

Radio ads tout small-business loan programs. A blizzard of brochures and press releases fill the mail. Bank-sponsored small-loan workshops dispense advice. And an army of bank loan officers treks out daily to make old-fashioned door-to-door cold calls on small firms.

“The competition is incredible, and the market is fierce,” said Gordon Smith, a vice president with the Federal Reserve Bank in San Francisco.

To be sure, big banks’ focus on small firms is not entirely market-driven. With politicians and government officials newly focused on small business, a dizzying array of specialized small-business lending programs, particularly for urban areas, now exists. Nonprofit groups and government agencies are involved in so many programs that many lenders can’t keep track of all the programs available, Valdez said.

But more fundamentally, what brought the bankers courting small firms were the corporate downsizings and mergers during the recession. For years, big banks were chasing the same top 2% of corporations--those with sales of more than $5 million yearly, said Janet Garufis, a senior vice president with Bank of America. But with fewer big firms, and with many of those getting financing outside of banks, big banks had to scramble for new customers, she said.

At the same time, workers laid off in the downsizings became entrepreneurs seeking financing, Valdez said.

In addition, banks faced new competition on several fronts. Previously, bankers could just sit in the office and dispense loans as applicants drifted in, lenders here say. But once bankers identified small businesses as a market, programs were tailored especially for them.

Fast behind the recognition came improved technology and simplified processing. In the past, a shoe store owner seeking $35,000 and a hospital executive wanting $40 million went through the same process, said Dan Morefield, a senior vice president with First Interstate Bank. Both applicants sat through hours-long interviews as loan officers labored over their financial records and manually copied data onto bank forms. Now, with simplified forms and computer-relayed data, small-loan processing is speedier, less labor-intensive and more cost effective, Morefield said.

Taking such steps might seem obvious, but it has helped turn California’s bankers into national leaders in small-business banking. Wells Fargo and B of A rank at the top of U.S. banks both in terms of dollars lent to small businesses and the number of loans made, FDIC data shows.

Yet even as bankers proclaim a turn to small businesses, many small business owners don’t believe it.

“The first thing out of their mouths is, ‘I’m sorry, we can’t help you,’ ” said Dorys Forray, owner of East West, a Hollywood promotion firm. Forray said she was turned down for a loan five years ago and that now, although loan officers from a big bank sought her out, she appears headed for a second denial.

“Even though they say they want the small-business person, they don’t make it easy at all,” she said, a sentiment other small-business owners echo.

“The bottom line is that the majority of my clients come out of years of frustration with the big banks,” said Barbara Maller, vice president at Marathon Bank in West Los Angeles.

The larger banks do what Maller calls “cookie-cutter loans.” An application is not approved at a local branch but is sent to a loan center and must fit standardized lending rules before the bank will provide a loan, she said. “Nobody sees these people; no one goes to their place of business; nobody knows what they do or need,” she said.

A few of the larger banks have even earned reputations for fiercely courting a market one year only to abandon it the next, she said. And, Maller said, big banks may be seeking small customers now simply to lose a “big, bad bank” image.

But then it’s hard to love a big bank. Said Dial of Wells Fargo, “Even the people that are borrowing from you are convinced that they are the exception.”

Monica Saunders, owner of Loubara’s, said she and her husband had heard all the horror stories before they applied for their loan. But now, with opening date just days away, as painters and tile layers are bustling about, Saunders said, “It’s hard to say these banks don’t do it, because they did it for us.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Small Loans, Big Banks

Though criticized for not doing more, California’s largest banks make the majority of the state’s loans to small businesses. In June, 1994, outstanding small business loans in the state totaled $11.34 billion.

Wells Fargo: 31.2%

Bank of America: 15.1%

Other big banks (First Interstate, Union, Bank of California, Sanwa): 8.3%

Other lenders: 45.4%

Note: Small business loans are defined as all loans under $1 million.

Source: Federal Deposit Insurance Corp.