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8.6.98  
The Bank Window Is Still Open
Big lenders say they're not pulling back despite Fed warnings

Are banks preparing to slam down on lending to small companies? You'd think so, given that Federal Reserve Chairman Alan Greenspan sounded the alarm again last month about lax bank-lending practices. After all, banks have historically viewed small businesses among the riskier loan candidates. And if this go-go economy heads into a tailspin -- as economists are starting to predict -- banks might offer up small businesses as their first sacrifice.

But so far, say officials at 10 leading U.S. banks, that's not happening with their small-business lending. They tell Business Week Online they see no reason to do anything different in light of Greenspan's comments, and business owners shouldn't expect to be treated any more harshly right now. Why? Because the banks say they beefed up small-business lending standards two or three years ago. If there are problems, the lenders suggest, it's with smaller banks that have been offering cut-rate terms.

Gregory D. Jardine, senior vice-president at First Union Bank in Charlotte, N.C., whose $2.7 billion small-business portfolio is growing at a rate of 25% a year, says lending standards at his bank have remained conservative, despite competitive pressures that have driven down spreads and fees, and led to easier terms, such as extending amortization schedules and delaying balloon payments (the huge payment that typically comes at the end of a loan).

"We feel that our credit policies for small-business lending have been appropriately conservative, and therefore we do not see a need to clamp down on credit policies," says Jardine, who is charged with corporate underwriting and portfolio management. "We monitor that portfolio very closely and look for the issues that would indicate a change or deterioration of credit quality, and we have not seen those yet."

Adds Bill Crowley, chief credit officer at Banc One in Columbus, Ohio: "What we are doing is appropriate for the market and the product that we are dealing with."

Those are soothing words to anyone trying to nail down financing right now. But history shows that when the Fed speaks, markets eventually listen, and Fed Governor Laurence H. Meyer underlined the central bank's concern during a recent interview with Business Week Online. "One of the most famous sayings in banking is that bad loans are made in good times," says Meyer, who oversaw a survey of bank loan standards in May and June. He says the economy's extraordinary performance and stronger financial conditions at businesses seeking loans has inflated confidence levels at banks, causing them to make loans now that they'll regret later. "Sometimes these loans last longer than the economic conditions,'' he notes.

In fairness, those high-growth conditions have been very lucrative for both small companies and their lenders, who aren't likely to turn you away while it seems like they can still make money. In fact, according to Veribanc Inc. in Boston, the number of loans to small businesses grew more than 27% in 1997. Outstanding small-business loans totaled $183 billion last year.

"This is a case where jawboning is not an effective policy," says Warren G. Heller, research director for Veribanc. "Bank policy is not a broad-based market thing, it is an individual management decision."

That sounds like a stalemate between the Fed and banks -- which leaves small borrowers as the winners. Competition for their business remains intense, making credit easier to get and pushing interest rates down. For instance, Michael R. James, executive vice-president for the Wells Fargo business banking group, agrees that lending standards for banks as a whole have loosened in the past two years. But Wells hasn't been been among those that slacked off, he says. Nevertheless, outstanding loans in the bank's $6.1 billion small-business portfolio rose 9% in the first three months of 1998. At Fleet Financial Services, Ralph C. Sillari, who heads the business and entrepreneurial services group, says competition from both large and small banks has lowered margins on its $3 billion small-business portfolio. "If we used to get prime plus 1.5, now we get prime plus 1.25 or prime plus 1," he says.

And the easy money means you can shop around not only for better rates but also better treatment. Noelle Clark, vice-president of Hasselbring-Clark Co. in Lansing, Mich., says her office-equipment business depends on getting speedy approval of loans. In tougher times, her company might have had to wait weeks to secure a loan. But in June, when Clark needed to quickly replace three cars for service reps at the cost of more than $11,000 each, she turned to Capital National Bank, which she began using six years ago after growing tired of dealing with the delays at a major national bank. Clark got a loan the next day after asking for the money over the phone.

"I've got to put technicians out in cars...I can't be without them, it is not even an option," Clark says. "In a small business, when you need to keep things going, you need to know now." The Fed notwithstanding, bankers remain more than willing to oblige.

--By Jeremy Quittner in New York

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