Banks such as Worcester-based Commonwealth National Bank utilize a wide range of tools and strategies to meet the credit needs of small businesses.
According to the Small Business Administration in Massachusetts, small businesses are the No. 1 revenue builder in the state, and with hundreds of small-business ventures starting up yearly, initial financing is a necessity.
Many banks have come to recognize the importance of developing a strategic and systematic approach to working with small businesses by familiarizing themselves with the SBA and other loan guarantee programs that can significantly reduce the bank’s risk exposure. But identifying a good business venture from a risky one is an important task for any bank.
Banks work with agencies such as the Office of the Comptroller of the Currency and the Minority Business Development Agency at the U.S. Department of Commerce that can provide information and guidance to small businesses. Banks also partner with community-based nonprofit technical assistance providers that can help make potential bank customers “borrower-ready,” improve the odds of success for small businesses and reduce loan losses.
But some bankers say it is often the bank loan officer’s instincts and first impressions of a company that determines whether a loan is granted.
“Every small business is different. They run the gamut from those that are highly thought-out with good business plans to those that are less so and it’s a know-it-when-you-see-it thing,” said Joe Riley, senior vice president for small-business banking at Eastern Bank. “When you look at the opportunities of those [businesses] that are well thought out Â… it’s not one factor. It’s all [the business elements] working together and sometimes you [the bank] have to use your intuition. Plans, experience and how well capitalized are they [the business] are from the outset is important. Eventually, small businesses become bigger businesses.”
According to the SBA, small businesses are defined as those with fewer than 500 employees or less than $5 million in assets. Small businesses employ more than half of all private-sector workers. However, the SBA states that one-third of new start-up enterprises fail to make it through the first two years, and only about half survive longer than four years.
Risky Business
According to some small-business lenders at banks, taking the risk of a business loan is part of the job.
“You never really know what is a good business,” said Gary Magnuson, senior vice president and division executive for regional banking divisions at Citizens Bank of Massachusetts.
But, said Magnuson, bringing in small-business clients can benefit the bank in other ways, including additional deposits and loans made to individuals.
“Small businesses in general, while they have borrowing needs, also have deposit needs and on a portfolio basis, the deposits exceeds the loan balances. We take an approach that it’s not just the credit needs of a company but the needs of an individual – there may be other needs [the bank can] provide to the person running the business,” said Magnuson.
What most small-business banking lenders agree on is that the investment is worth the risk.
According to Magnuson, “the success of small businesses is dependent on the entrepreneur who owns them.”
While lending to a start-up business or small businesses still in its formative stages often entails substantial risk, local bankers say extending credit to small businesses more often than not is a good line of business for the bank.
“No business that is successful and growing can really accomplish their objectives without outside financial support in the form of loans or equity. Small businesses are competitive and competition is good for consumers,” said Carl Bindoo, vice president of Worcester-based Commonwealth National Bank. “Small-business owners are the hardest-working people, in my perspective, and they are very profitable [for banks].”
Banks have a wide range of strategies and tools at their disposal to help them meet the credit needs of small businesses in widely varying circumstances – start-ups just getting under way and established businesses seeking to move to the next stage of growth; businesses helping to revitalize inner-city neighborhoods and businesses anchored in small rural towns; nonprofits and for-profits; home-based and internet-based.
“The advice we forever give to prospective customers is if they haven’t already, they should go to organizations and nonprofits where they can go and talk to somebody about putting a business plan together Â… that is impressive to a small-business banker,” said Riley.
But finding the right business for a bank to invest in takes more than reviewing a slick strategic business plan.
“We look at the small business track record, and generally for startups, we do an objective evaluation and look at who is going to manage [the company], what is their experience and so forth, and analyze if there a good likelihood that the startup business owner can successfully manage this business,” said Bindoo. “We look at character and experience and we base a lot of our decisions on the person we are dealing with.”
Marketing, advertising and word of mouth let small-business owners know what banks are available to help finance their business needs.
Riley said traditional bank advertising, participation with nonprofit business advocacy and community development organizations, and grass roots efforts with business development officers in the field can help the word out to local business owners about bank products and services geared toward small businesses.
“Getting involved at the local community organization level Â… lets your bank representative get in touch with small-business owners,” said Riley. “And, being an SBA preferred lender sends a very clear signal to small-business people of your interest in them.”
Radio, news and direct mail advertisements also reach out to select audiences, but one community bank official said customer service often is the main differentiating factor a small-business owner may consider when selecting a bank.
“We use the traditional source of marketing by direct mail, news and radio, but we mainly satisfy the needs of the customer and they are the best marketing tool because they go out and market for us,” said Bindoo, who said most of Commonwealth National Bank’s small-business clients come from referrals from other Commonwealth customers. “We are very excited about the small-business community and we tend to create [lasting] relationships. We differentiate ourselves from the big banks through service. When someone applies for a loan at Commonwealth, they are talking to the person who is going to make the decision on that loan. Small businesses are an engine to the economy and banks need to fuel that engine.”
As with any business venture, however, taking a risk in lending entails planning for and accepting possible negative consequences from time to time.
“We think it’s an important line of business and it delivers a significant amount of opportunity. Everything is a risk – if you spread the risk over the broad number of customers we service, and as long as we are doing our job right, it’s not a loss and it’s a good risk,” said Magnuson.
“The banks’ biggest nightmare is a failure [of the small-business loan recipient], but as bankers, we are in the risk business,” said Riley. “If you made every loan with the idea of never having a bad situation, you would never make a loan.”
Regardless of the size of the loan, the size of the business or the profitability of the business over a span of time, bankers say small-business investments are key to the overall profitability of many banks with a strong commercial bent.
“We try to become trusted advisors to the business and for Citizens Massachusetts, small-business banking is the most profitable division in commercial banking on a mere profit basis,” said Magnuson.
According to bankers, at the end of the business day, small-business banking is a profitable revenue source and a good investment for the bank.
Partnering banks with small businesses is a win-win situation, said Riley.
“Small-business banking is a terrific opportunity for banks and small businesses. The number of companies that would classify as small business compromise the vast majority of business ownership in the country,” said Riley. “Every business that you can think of started out as an idea of someone and grew into something larger.”
