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When nonbank lenders exploded onto the small-business credit market, the buzz was that they would swallow community banks' share of Small Business Administration loans. But as competition intensifies, it's the nonbank lenders that are being pushed out of the market. Case in Point: Chicago-based Heller Financial announced on Feb. 20 that it will no longer be involved in the origination of SBA loans.
The company has been one of the largest nonbank generators of SBA loans, funding $459 million in SBA 7(a) loans in fiscal year 2000, just over 4% of the total amount of funding approved by the SBA for the year. Despite its size, Heller has been unable to compete with community banks, says Chairman and CEO Richard J. Almeida. "These banks are able to price the loans in a way that captures all the revenues derived from that relationship -- like deposits, asset management, and personal loans," he says.
COMPETITIVE DISADVANTAGE. Additionally, since Heller has to raise funds through the money and capital markets, it was unable to compete with banks' access to low-cost deposits, Almeida says. "As the competitive dynamics changed, it's been impossible for us to reach growth-and-profit targets, and this is no longer an attractive business for us."
Although Heller has quit the small-business loan market to focus exclusively on middle-market companies with annual revenues between $5 million and $250 million, it will still service small-business clients in the areas of equipment leasing, real estate financing, and health-care financing.
Almeida also attributes the decision to the divergence between the SBA strategy of reaching as many small-business owners as possible and Heller's aim to reach the upper-end of the market. "The SBA's goal is just more compatible with community banks," Almeida says. "It's a very regional business."
CREDIT CRUNCH? But Ann Grochala, director of bank operations at Independent Community Bankers of America, which is based in Washington, D.C., does not expect community banks to pick up the bulk of the market that Heller has abandoned. "Any time a dominant player leaves, it does create some opportunities for all but large banks, and large nonbank players focused more on urban centers, are more likely to step in," she says.
Meanwhile, experts are concerned about a tightening credit market. "In the short term, I don't think anyone will step in, and that means many businesses will have to find alternative sources of credit," says Dave Potterton, director of research at Meridien Research, which is based in Newton, Mass. Warns Potterton: "This does have an impact, but it probably won't be felt for a while. It could potentially be an issue six or eight months down the road." By Naween Mangi in New York