Sure, U.S. interest rates are going down, but will entrepreneurs be the beneficiaries? For one clue, look to Harris Bank, a Chicago-area bank that likes to think of itself as a special friend to small businesses.

Three weeks after the U.S. Federal Reserve cut benchmark rates for the first time since January, 1996, senior Harris Bank officials say they may have to kill an unusual discount program that makes loans to small businesses at 0.50% below prime, which stands at 8% nationally. That's quite a bargain, since small businesses are among the most risky credits and usually are lucky to get rates within a few points above prime. Says Warren Heller, research director at Veribanc, a bank analysis firm: "I don't know of anyone that's doing this so cheaply."

Harris has made more than 4,500 loans of less than $500,000 -- the most you can borrow under the program -- in the last four years since the program's inception. But industry analysts say it's hard to see how the program can be profitable for Harris, and officials there acknowledge that the deal will probably end on Jan. 31, 1999. Indeed, note analysts, the pressure is on. Banks are still paying relatively high rates on deposits, so cut-rate loans leave little room for profit.

Harris Bank officials insist that they are not backing away from their entrepreneurial clients, nor have they made a firm decision to eliminate the special deal for small businesses. "It was part of our marketing strategy, which was to become the dominant small-business bank in Chicago," says Emilia Dimenco, an executive vice-president for Harris. What could be more attractive to cash-strapped small companies than a big break on loan rates? Dimenco says Harris is weighing a package of unspecified offerings, which she declined to discuss.

By Jeremy Quittner in New York
jeremy_quittner@businessweek.com

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