Small-Business Loans a Big Lure for Banks
The way two of California’s leading business banks were courting him, David Kang felt more like the head of a Fortune 500 company than the owner of a 27-employee shop that makes tiny boilers for dry cleaners.
Shortly after Kang inquired about a loan, both Bank of America and City National Bank dispatched officers to his modest downtown Los Angeles business. Forty-eight hours later, City National made a solid offer--a $1-million government-backed loan with an interest rate of 8.5%. Not to be outdone, B of A lowered its original proposal to beat City National’s rate.
City National eventually won the bidding war, and threw in an additional $200,000 credit line that Kang hadn’t even requested.
“I felt uneasy about it,” said Kang, an unassuming businessman whose past efforts at getting a loan brought mostly discouragement. “I don’t like wheeling and dealing. I didn’t want them to be fighting against each other, but they did it anyway.”
Once virtually personae non gratae, small-business owners like Kang are the new darlings of the banking industry. With banks big and small fighting for their attention and resorting to unprecedented steps to grant them loans, small-business lending has become the fastest-growing and most competitive segment of the banking industry.
B of A last week publicly pledged to make $80 billion in small-business loans over the next 10 years--a huge sum that analysts say could give a significant boost to the California economy.
And on Thursday, Wells Fargo Bank committed $1 billion over the next six years to Latino entrepreneurs. Wells Fargo, which has been closing its traditional branches, recently opened 16 separate offices just for small-business customers in the Los Angeles area.
The sudden interest in small businesses, particularly by large lenders, is being driven by a strong economy, burgeoning demand by entrepreneurs and the development of computerized loan approval techniques. Nationwide, small-business loans are growing at twice the pace of other commercial and industrial loans.
Potential Profits Spur Competition
The activity is especially brisk in California, where commercial banks made almost $17 billion in small-business loans in the year ending in June, an increase of 21% from a year earlier, according to the latest data from the Federal Reserve Board.
Although the boom in small-business loans could present problems for lenders down the road, especially if there is a downturn in the economy, for now these loans are helping banks post record profits. Loans to small businesses often have higher interest rates, generate large fees and can lead to additional business for banks.
The potential for profits is also pushing big thrifts, finance companies and other nontraditional lenders to step up their marketing to small businesses. Glendale Federal Bank, a thrift with assets of $16 billion, has hired about 30 business banking officers in the last two years to target entrepreneurs.
On a recent afternoon, a team of eight Glendale Federal branch managers fanned out in a light industrial district in Fullerton, knocking on doors of mom-and-pop businesses. The afternoon “blitz,” as leader Skip Wells calls this regular effort, netted a $50,000 loan to a machine shop owner and business cards from 35 other companies for future sales attempts.
Wells, a small-business specialist who previously spent eight years at Glendale’s archrival, Wells Fargo, also meets with managers in north Orange County once a week to make phone calls, targeting accountants who could provide leads on potential small-business customers.
This burst of activity and emphasis by banks has been a welcome relief to small-business owners. Even though the banking industry’s approval rate for small-business loans has remained at about 50%, and start-ups continue to struggle with securing financing, business owners now have a better chance of getting a loan because they have many more lenders and loan products to go after. And this may be the best time ever for entrepreneurs with a proven track record, who are getting phenomenal deals in unusually quick fashion.
“It’s definitely a borrower’s market,” said Alberto Alvarado, head of the Los Angeles office of the U.S. Small Business Administration.
When Rosa Ugarte sought an SBA loan from Wilshire State Bank in Los Angeles, a bank representative not only came to her Montebello restaurant but spent two hours helping her complete all the SBA forms while Ugarte was tending to customers.
Forty-five days later, Ugarte had a $220,000 loan in her hands, enabling her to expand her business. Earlier this year, Ugarte held a grand opening for the third branch of Ordonez Mexican Restaurant and Cantina. Among those gathered for the celebration: three representatives from Wilshire State Bank.
For banks, the attraction to small business is simple: It’s critical to their future.
That is especially true for lenders in California, whose economy is increasingly being dominated by entrepreneurs. Firms with fewer than 100 employees now comprise 98% of the state’s businesses, and they continue to take up slack created by large company layoffs, mergers and the shift from heavy industry to high technology and service-oriented businesses.
“Small-business lending is one of the single most profitable operations that the banks still have a dominant position in,” said John Racine, an analyst at SNL Securities, a banking research firm in Charlottesville, Va.
Many community banks, of course, have long focused on small businesses, in part because their tiny capital levels prevented them from making big loans.
But it wasn’t until a few years ago that large banks, with assets of several billion dollars or more, began an aggressive push into this market. The main deterrent historically was cost. Because it took about as much time and labor to underwrite a $100,000 loan as a $1-million note, the big banks simply concentrated on bigger loans, which usually went to large companies.
But in the early 1990s, Wells Fargo Bank and a few banks found that they could make small loans much more cheaply by using a computerized-approval method known as credit scoring. The technique, originally developed for consumer lending, uses a statistical model to determine risk based on certain factors such as credit history and current financial information.
Wells Fargo now mails out millions of loan applications to small-business owners annually, some of them pre-approved and most of them offering credit lines or loans of up to $100,000. This effort has boosted Wells Fargo’s small-business loan portfolio from $400 million in 1990 to more than $4 billion in the last fiscal year--making the bank one of the nation’s largest lenders of loans of $1 million or less, which are generally considered to be small-business loans.
Other major banks in the state, including B of A, Union Bank of California and Sanwa Bank, have followed suit, using credit scoring to reduce paperwork to just a single-page application. Led by these bigger institutions, California commercial banks overall made 580,000 small-business loans in the fiscal year ending in June, up a whopping 43% from the previous year, according to the Federal Reserve Board.
Smaller Banks Try New Strategies
“The push by big banks into small-business lending has been more than just cheap talk,” said Mark Levonian, an assistant vice president at the Federal Reserve Bank of San Francisco, in a recent research report.
However, Levonian said, big banks have retreated somewhat from making loans greater than $100,000 and less than $1 million, because credit scoring generally is not amenable to the larger amounts. As a result, he said, smaller banks have moved more aggressively to fill that gap.
Community banks are fighting to stay in the game with their Goliath rivals using one main strategy: More customer service.
Nowadays, loan representatives from small banks are spending hours helping clients fill out copious SBA forms, making site visits so their customers don’t have to come to the bank, approving loans in a day by calling ad hoc meetings, and even acting as informal business counselors.
“Larger banks are too big to really get into the dynamics of each small business,” said Justin Moon, assistant vice president of SBA lending at Wilshire State Bank. “But we’re able to service our customers because we know our area and the types of businesses our clients typically set up. We can get the story better.”
Small banks also are more willing than their big banking rivals to finance start-ups and riskier businesses because they visit businesses and try products.
“We get to know them, so we’re willing sometimes to take risks,” said Chingying Chu, executive vice president at First Continental Bank in Rosemead, which like many other small lenders has focused on SBA loans because they are 75% guaranteed by the government. “People don’t need extensive financial backgrounds to get a business loan.”
That intimate understanding of customers and the local market also figures to be an advantage for small banks if there is an economic downturn.
“Community lenders keep their ears close to the ground, so when they start hearing rumors [of problems], they can do more to bolster their position,” said Warren Heller, research director at Veribanc, a Massachusetts bank rating firm.
But because big banks rely on credit scoring models and statistics, Heller said, they face greater risks. “They’re highly tuned to what those statistics have predicted, but if you get a change that drives those statistics, banks can get hit with losses and very often without warning,” he said. “And if you get a downturn in the economy, you could get a larger number of big banks getting blindsided.”
Also, both big and small banks face a major threat from nontraditional lenders, such as G.E. Capital Corp., and credit card companies, which are increasingly targeting small-business operators.
“I’ve been in the banking industry not quite 20 years and I’ve never seen it as competitive,” said Lisa Prescott, B of A’s executive vice president of small-business banking. “Right now we’re at a point where it’s survival of the fittest and most creative.”
Lee is a Times staff writer. Seo is a correspondent.
* LOANS FOR LATINOS: Wells Fargo Bank is pledging $1 billion in loans to help Latinos nationwide expand their businesses. D1
