Loan stars: with new technology at their fingertips, banks are opening their doors to small business

Entrepreneur, Nov, 1997 by David R. Evanson

Schwartz's story dates back to 1985 when she formed Schwartz Research Services Inc. in Tampa, Florida, offering consumer research services. By 1993, business was so good, she went looking for a loan to build a focus group facility and corporate headquarters. She naturally turned first to her bank, which had all her personal and business accounts, and applied for a $350,000 loan. "When the loan officer called to ask if I had gotten the business from my husband in a divorce," says Schwartz, "I knew the loan request was going to be turned down." She was right.

* THE COLOR OF MONEY

While small businesses and banks would seem to make a great combination, in reality nothing could be farther from the truth. The crux of the problem: Banks are working with other people's money. When customers make a deposit, they expect their money to be present and accounted for when they want to withdraw it. This puts the bank in what many lenders refer to as an "abundance of caution" mode. Simply put, this means banks won't get involved in situations where a loan is at risk, period.

This alone should speak volumes about the behavior of your typical loan officer. Still, many entrepreneurs get angry when banks don't appear interested in making loans to their small and sometimes highly risky businesses. But take a walk in the banker's shoes. If you were working with borrowed funds that had to be paid back upon demand, would you lend them to a business with a dubious ability to repay the loan? Of course not. So why should banks? They aren't built to lose money. They are, in the final analysis, running a business.

Another reason banks historically have not been fired up to lend money to small businesses is that small businesses typically request relatively small loans. The abundance-of-caution mode in which most banks operate means the analysis and disbursement of loans is a downright expensive process. The banker visits the company. Then visits again. Then reviews a loan proposal. He or she might even call on some of the business's customers or suppliers just to make sure the whole thing is for real. Then the banker submits a loan proposal to the credit committee. If it gets approved, the bank will create a truckload of documents, which the borrower will haggle over. The bank's lawyers will haggle back. Then the loan gets disbursed.

For the bank, it doesn't stop there. A loan officer will be assigned to the loan and will review the borrower's financial statements each quarter until the loan is paid off to make sure the company is not violating any covenants of the loan agreement.

The problem for small-business borrowers has been that the costs for the loan process were the same whether the borrower wanted $150,000 or $15 million. From the bank's perspective, if the costs are the same, it would rather distribute them over a larger loan, not a smaller one.

* TECHNOLOGY TO THE RESCUE

According to Robin Wantland, a regional executive with Bank One in Dallas and the former chairman of the American Bankers Association's Small Business Division, information technology is changing this scenario by helping banks drive down costs in three critical areas: loan acquisition, risk management and loan servicing.

Wantland says in the old days, banks were run by big mainframe computers, and data had to be hard-coded to do any kind of analysis. But with today's client server technology, it's a different story altogether. "With data stored on a server," Wantland says, "it's available to product managers, risk managers, marketing managers, customer service managers and loan officers - and it's helping them do their jobs at costs that make small-business loans feasible."

At the center of this empowering technology is the area of credit analysis. Instead of relying on traditional analysis, which is costly and time-consuming, banks are now starting to rely on the kind of credit scoring systems that credit card companies have used for years.

Fair, Isaac and Co. Inc. of San Rafael, California, a data analysis software firm, has a commercial credit scoring system that's helping to dramatically reduce bank loan approval times and costs - and thus put money into small businesses' pockets faster. Latimer Asch, the firm's vice president of commercial products, estimates banks that don't use this kind of system require 12.5 hours of human "touch time" to reach a credit decision and that the cost to reach this decision ranges between $500 and $1,800. He maintains that with his company's Small Business Scoring Service, the time required by the bank to reach a credit decision (assuming the decision is totally automated) is 15 minutes and costs just $100.

In addition to easier and less expensive credit analysis, Wantland says banks can monitor the loans with fewer resources, too. So rather than the expensive relationship-oriented model that banks once used to make sure their loans were in good shape, loan officers can now retire to the background and check a business's loan status by computer. In fact, Wantland says that if companies keep their credit records clean, the borrower will never even have to hear from the lender.