“Looking For Small Business Loans Today”

by Miles M. Stuchin
milesMiles Stuchin,
President of Access Capital

This is a story about why banks don’t make small loans, loans of a half a million dollars, a million or even more. This is also a story about the commercial finance companies that do make these loans, and why a company that’s treated like an ugly duckling at a bank can become a beautiful swan with a non-bank lender.

Do you remember when $1,000,000 was a lot of money? When Austin Powers was still dressed fashionably, commercial banks were local businesses, not even regional, and certainly not national. By law, banks could not underwrite securities and securities firms were not in the banking business. When a company needed capital, it got a loan from the bank on Main Street and, if the company was large enough, it issued stock or bonds with an underwriter on Wall Street. How 20th century!

Today, banks have more assets, broader geographical reach and a wider variety of business activities. Lending to small business is no longer necessarily a critical core banking activity, but only one of a large number of programs competing for limited bank resources. The service of providing working capital is today viewed as a bank “product” line, sold into the marketplace like a breakfast cereal or a new car model from Detroit.

This evolution has produced some clear winners and losers. Perhaps the biggest winners are the stockholders of our largest banks. The banking industry is enjoying record earnings, unprecedented balance sheet strength and more abundant capital than at any prior time in history. For our nation’s banks, in general bigger has been better.

At whose expense has the success of our large banks come? My nomination for the group most hurt by the growth of the largest banks would be the smallest customers of these banks, specifically the customers whose needs don’t easily fit comfortably within a bank’s “product line,” and whose size isn’t large enough to justify the time required to modify the standard issue assembly line product.

From a banker’s perspective, the decision to cut back on non-standard small business lending can easily be justified. Each bank profit center competes for capital and personnel. The viability of small business lending might be measured against such diverse financial sector activities as stock brokerage, insurance sales, pension fund management, trust and estate administration, mortgage loans and consumer credit cards, as well as direct loans to jumbo credits and participation in syndications to large national and global borrowers. How much money does each activity earn, what is the risk associated with it, and what other business does it generate for the bank? Big business lending can result in big profits and lots of other banking business opportunities. What can a small company offer in comparison?

Small business lending has also been permanently altered by the increase in disintermediation, a six-syllable word for the sale of loans from a lender, such as a bank, to an investor. In a typical transaction, a bank would create a package of a large group of similar types of loans and allow an underwriter to raise money for the bank by using the pool of loans as collateral to sell an asset-backed securitization. It’s a cheap way for a bank to raise money, but for a borrower there’s no benefit unless the borrower’s loan is “similar” to all of the other loans in the same group. The need for similarity is imposed by the investors in a securitization, who are buying a consistent product, with no wiggle room for exceptions. Because of the growth of the securitization market, even small banks with limited financial “product” offerings can sell their loan portfolios to achieve greater balance sheet liquidity, a blessing to the little banks but potentially a curse to the non-standard borrower.

While a bank could still carry the nonconforming paper of a small business borrower directly, this would again raise the question of whether that would be the best use of the bank’s resources. Standard loans can be processed by computers, with standard documentation and standard covenants. Deviations, even if they could result in improvements in the credit, would require an actual thinking human being to consider the change, write it up, get it approved by superiors, and live with the exception for the life of the loan.

So, what’s wrong with being just like every other small borrower if it makes it easier to get a loan? Stated bluntly, just about everything. Success as a small business requires the delivery of a sufficiently differentiated, and enhanced, product or service that will cause customers to actually do business with the company. Commodity level work won’t even be noticed.

Once a small business is in the door of a new customer, the development of the relationship requires the ability to balance constantly changing customer needs with the need to deliver the work product desired at a price that results in an adequate profit. Each customer is different, each order is different. Businesses require financing that can be molded to the requirements of the business. A small business has enough challenges to its survival without having to contend with the additional burden of trying to shape itself to fit the demands of a canned loan “product.”

And just as the survival of a small business requires a successful niche strategy, the best small business lenders, non-bank commercial finance companies, do only that. The benefit of entrepreneurs borrowing from lenders who are themselves entrepreneurs is compelling. The borrower can deal with people who have the right skill set and experience and who structure each company’s unique needs without having to satisfy a pre-cast product mold.

Unlike a bank, a commercial finance company is not trying to sell stock brokerage, trust planning or some other financial “product.” The focus is solely on providing a borrower with growth capital. While the banks have fled Main Street for Wall Street and they’ve left small business lending by the wayside, the future of these deals will belong to those who specialize in them, and only them, the non-bank, non-regulated commercial finance companies.

Miles M. Stuchin is the founder and President of Access Capital, Inc., New York, New York. Access Capital is one of the nation’s leading independent commercial finance companies specializing in the capital needs of small and rapidly growing companies.