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Special Report (Enterprise) Finance -- BORROWING
A LAND OF PLENTY FOR LOANS
Brokers and credit-card issuers are among the new sources
Here's the way you might get a loan for your small business. You'll boot up your PC and jump to a Web site listing business-loan opportunities. Menus will let you choose lenders who specialize in your type of business. A few mouse clicks, and a one-page application for a credit line will appear on your screen. Don't like computers? Don't worry. Your newspaper will carry ads with toll-free numbers of lenders that will take your application over the phone. Your business mailbox will be stuffed with "preapproved" credit solicitations.
Parts of this brave new world of small-business lending are already in place. Others are on the way. Since the beginning of the decade, new technology and new competitors have plunged the business of lending money to small business into a period of breathtaking change. Business loans by telephone, approved credit lines marketed by direct mail, and loan applications on the Internet are realities. And for the credit-hungry small-business owner, that means loans are easier to get--and available in more convenient forms--than they were just a few years ago. "The field of small-business finance is changing very rapidly," says William J. Dennis, a senior researcher with the National Federation of Independent Business. When it comes to getting credit, "there are now more opportunities and more alternatives, not just in sources of financing, but in products and rates as well."
Just ask Diane and Wade Butler, owners of B&B Plumbing, Electrical & Gas in Corinth, Miss. They recently bought a computer, a desk, and two electrically operated drain-cleaning machines for their $60,000 business using a $15,000 lease line from American Express Co. The drain cleaners replaced hand-operated equipment and "save a lot of wear and tear on us," says Diane Butler. Although B&B is 10 years old, local banks were reluctant to provide credit for purposes other than financing the truck the Butlers use for their business. But as users of the American Express business charge card, they got an offer in the mail earlier this year for five-year leases, albeit at an 18% annual interest rate, on equipment bought with the card. "This was an opportunity to purchase things we really did need," says Diane Butler.
It used to be that a local bank was the main place to get a small-business loan. But now, some of the nation's most powerful financial-services providers are making small-business lending a top priority. The chief reason: With the markets for consumer and big corporate loans tapped out, small enterprises represent the last big reservoir of unmet credit need in the U.S. There are no authoritative figures for the overall size of the market, but Wells Fargo & Co. estimates that loans outstanding to businesses with fewer than 100 employees total about $500 billion nationwide. The market is growing at a 25% annual clip, according to First Manhattan Consulting Group, because of new business formation, more aggressive marketing mf credit, and the replacement of business loans disguised as consumer loans--home-equity loans used to finance a homeowner's business, for example--with genuine business loans.
MORE CHOICES. Major banks, such as BankAmerica, Banc One, and Wells Fargo and nonbank financial-services companies, such as American Express and Merrill Lynch, are racing to set up or expand coast-to-coast lending operations, using direct mail, telemarketing, or nationwide sales forces to flush out customers. Specialty lenders, including equipment lessors and Small Business Administration loan specialists, are pouring resources into battles to dominate their niches and laying plans to invade the conventional small-business-loan market. Local banks, seeing their best customers picked off by bigger rivals, are fighting back by stressing customized service.
As small-business lending goes national, borrowers "are going to have a lot more choices. They are going to be able to shop," says BankAmerica's small-business lending chief, Janet Garufis. Adds Hoyt E. Wilkinson, a Santa Monica (Calif.) consultant at First Manhattan: "From the borrower's standpoint, this is heaven-sent."
It's not an unmixed blessing, of course. Credit is not likely to be equally available to all segments of the small-business community. "A rapidly growing business will always be a problem," notes NFIB's Dennis. And some observers fear that the mass marketing of business credit lines will encourage entrepreneurs to overborrow, digging themselves into the kind of credit hole in which many consumers find themselves with credit cards. Then, too, the current feeding frenzy to serve the small-business customer will undoubtedly cool off when less cautious lenders take losses on imprudent loans and pull back from the market. "A lot of lenders are rushing into this ill-prepared," warns First Manhattan's Wilkinson.
Right now, though, everybody is jumping into the pool. And in the rivalry to build nationwide small-business lending operations, nonbanks--including brokerages, credit-card issuers, and finance companies--have a head start over banks, thanks to long experience with direct marketing and centrally managed sales operations. "The biggest threat to banks is from nontraditional players, such as brokerages," notes William L. Parsons, a business-banking specialist at Banc One in Columbus, Ohio. Merrill Lynch & Co., for example, has been offering loans to its small-business customers for more than a decade. The brokerage has built a portfolio of more than $1 billion, thanks largely to a service that combines a credit line with sophisticated cash-management features.
RUNAROUND. GE Capital's Small Business Finance Corp. is getting new business by zeroing in on the market for SBA-guaranteed loans. For Lauren B. Moseley, a Bedford (Tex.) corporate refugee with plans to open a health-and-fitness resource store, GE's aggressive approach allowed her to finance her new business. Most lenders avoid startups, and Moseley got the runaround from several banks. But a Dallas consulting center affiliated with the SBA put her in touch with GE. Impressed by her business plan and credentials as a Harvard business school graduate and former marketing professional with Johnson & Johnson Medical Inc., GE approved in December a seven-year, $90,000 SBA-guaranteed term loan at 2.75% over the prime rate to pay for equipment, inventory, and working capital for her store, named Health & Fitness Resource. "When I decided to do this, people said: `Nobody is going to give you financing,"' Moseley recalls. "But I found it was possible."
Banks, which traditionally served small business from local or regional branch networks, aren't about to give up a core business such as small-business lending. "This is our bread and butter," declares Garufis. Wells Fargo has already built a nationwide lending operation, and other banks are following.
Helping to fuel the growth in small- business credit is the development of high-tech techniques for processing and servicing loans under $50,000. Until recently, loans were granted based on detailed financial statements and a banker's personal judgment about the trustworthiness of a borrower. Today, loan approvals increasingly are being made not at a banker's desk, but in sprawling computerized processing centers. These loan factories can handle huge volumes of business, lowering the cost of making loans from thousands to hundreds of dollars. And loan applications have been pared down to a few key pieces of financial information about the business and the business owner. Computers give each application a score based on the statistical likelihood that the borrower will repay.
CREDIT BY MAIL. Advanta, the Horsham (Pa.) credit-card company, has used these methods to build in less than two years a business-card portfolio that it estimates will top 70,000 customers and $200 million in outstanding credit by yearend. Using direct mail, Advanta offers business credit cards with lines up to $25,000. It targets companies that don't have an accountant on staff, 80% of which have less than $1 million in annual sales. "We believe you don't need a face-to-face relationship to do this," says Albert E. Lindenberg, president of New Jersey-based Advanta Business Services.
The new technologies are dividing small-business lending into distinct segments. At one end of the market, off-the-shelf loans for relatively small amounts will be sold nationally by direct marketing. Business credit lines accessed by credit card or check will become a standard product. At the upper end of the small-business market, companies that want loans in larger amounts will be able to choose among banks, brokerages, and finance companies such as Merrill Lynch. At this level, providers will offer loans as part of a broader package of financial products and assign "relationship managers" to manage customer accounts. "We attempt to be the financial adviser to our customers," says Peter W. Stanton, a vice-president in Merrill Lynch's Business Financial Services.
Whoever dominates the new world of small-business lending, it's clear that staid and tradition-bound lending practices are fading rapidly. Today, the small-business borrower is suddenly the hottest ticket in financial services, and once-scarce credit is becoming abundant. That may make the life of the harried small-business owner just a bit easier.By Sam Zuckerman in San FranciscoReturn to top