Currency events: small-business owners confront an ever-changing banking climate

Entrepreneur, April, 1996 by Cynthia E. Griffin

It's all rather confusing. Getting a loan from a commercial bank seems to be a matter of having the right numbers. But exactly what constitutes the right numbers is a matter of debate.

George Fournier had the numbers. "Our financial status as a company was good; we run a pretty tight ship," says the owner of Industrial Rubber and Gasket. Fournier borrowed $500,000 from NationsBank to purchase a building for his 5-year-old Nashville, Tennessee, firm in 1994.

Lynne Behnfield thought she had the right numbers, too. After all, she had been successfully running InfoMatrix, an Albuquerque, New Mexico, company that offers information services ranging from computer training to technical writing, for 15 years. In 1994, seeking to expand faster, Behnfield decided to purchase a second company, also woman-owned.

"It was a sound, profitable 10-year-old company with no debt. I knew it would buy itself," remembers Behnfield, who also wanted to show other women it was possible to secure a commercial small-business loan with the proper paperwork and packaging.

To her surprise, Behnfield, who chaired the Access to Capital Committee for New Mexico at the 1995 White House Conference on Small Business, found that good numbers don't necessarily result in a loan.

"Of all the bankers I talked to, only one understood what I meant when I said this company will buy itself," laments Behnfield. "None of these bankers had ever been in business or even understood business. They were going with formulas set by the government or the Small Business Administration (SBA)."

Bill Enloe, CEO and chairman of Los Alamos National Bank, was the lone banker who did understand--and gave Behnfield an $80,000 loan. "I've always stressed the importance of shopping around [for a bank]," says Enloe, whose Los Alamos, New Mexico, bank lends $40 million annually to small businesses. "Find a bank or an individual in the bank who's interested in your business, who takes the time to understand your business, who can look at your business plan and understand your industry."

For most entrepreneurs, however, finding that empathetic, knowledgeable banker is like searching for a needle in a haystack. And even though many banks are now touting their friendliness to small business, Enloe thinks there is "a lot more marketing than meat with much of that advertising."

"You see huge marketing efforts promoting small-business lending, but I see more and more [small] businesses coming to us that should be getting financed in their own regions," Enloe says. "[Behnfield] is a good example. We don't have an office in Albuquerque or Santa Fe, so she wound up in Los Alamos, 100 miles from where she operates."

"I think banks shift targets an awful lot," adds Chris Worel, a former banker and owner of The Bahncorp Institute, a financial consulting firm in West Palm Beach, Florida. "They have their 'product of the month'--say, equipment financing for small business--and when they have enough of that, they go on to something else."

Dennis Jones, CEO of Hinsdale Bank and Trust Co. in Hinsdale,

Illinois, believes banks are paying more attention than ever to small- business loans because the caliber of borrowers is changing. "As companies get restructured and people get outsourced, more and more individuals are starting their own businesses," he says. "Their credit profiles are very good; they have a long history of paying bills on time and often have capital to start a company."

Jones admits some industry segments--restaurants and service-oriented start-ups, for example--have particular difficulty getting loans because of their high default rate. But he believes prejudices against service businesses will decline as bankers become accustomed to a service-driven economy.

Battered Banks

The banking industry has weathered a number of drastic changes in the last decade. Knocked about by the ill winds of the savings and loan crisis, banks found themselves subject to heavy regulation, says Worel, author of Breaking the Bank (P.T. Publications).

Among the changes that impact small companies is the way banks recognize bad loans, Worel says. "Banks now collect financial information no less than once a year, and even if there is no request [for funds on the table], each loan is analyzed as if there were," explains the consultant, who worked in the banking industry for seven years.

The bottom line: Even if a small business is repaying a loan in a timely manner, it can receive a high-risk rating because the definition of a "bad risk" is now based on the overall picture of a company gleaned from annual financial statements, which might show deterioration from the previous year or quarter or indicate an imminent downturn. If you want to renegotiate your loan or line of credit later, the bank may point to this risk factor--and refuse.

Changing regulations are not the only factors affecting loans. In an era of competition, downsizing and mergers, banks are in the midst of tremendous internal and external upheaval.

"This national [bank] merger trend is affecting small businesses. I've seen it happen in New Mexico," says Enloe. "It's been harder for small and new businesses, particularly those perceived as high-risk, to find traditional financing."