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

Entrepreneur, April, 1996 by Cynthia E. Griffin

A more hidden, but no less devastating, result of the mergers is the shift of decision-making authority away from local branches to remote loan processing centers.

"Many bank officers don't have the authority to make the decision [to approve a loan]. All they can do is listen to your explanation, then take the package to somebody else," says Enloe. He believes the chances of getting a loan are seriously diminished if the decision maker hasn't personally talked with the entrepreneur, can't assess the impact the proposed new business will have on a community, and can't look at the big picture to see how lending capital to one small business could create a ripple effect of goodwill and new business for the bank.

According to American Bankers Association (ABA) figures, there were 879 mergers and acquisitions between January 1994 and June 1995. The number of actual banks dropped from 14,496 in 1984 to 10,168 by June 1995.

Jones, who is chairman of the ABA's Small Business Banking Committee, agrees that mergers and acquisitions have impacted small businesses but sees a silver lining, particularly in the Midwest: Megamergers have left the field wide open for relatively small banks, which are moving in to take care of customers who want a more personal touch.

On the other hand, Enloe says, the new, larger banks are also responsible for a national thrust in the last decade toward low-maintenance consumer and commercial loans--which may eliminate many small businesses from the running.

Jones agrees banks are seeking loans that don't require as much effort to originate or maintain. But he believes there is plenty of financing out there for stable, well-managed entrepreneurial firms. And in fact, he thinks small-business lending will become banking's bread and butter.

"Small-business lending may be one of the last profitable pieces of the commercial bank business," says Jones, who explains larger companies are becoming less likely to turn to banks for loans. "More and more large companies are doing direct placement of debt by selling bonds. They are not using banks as intermediaries." Consequently, banks are seeking new markets.

Another internal bank development affecting small business is the advent of credit scoring, in which banks develop their own standard formulas to evaluate applicants' lending and credit histories. The advantage of credit scoring: It helps banks make loan decisions faster, which lowers the cost of making a loan, says Eric Rosengren, vice president and economist with the Federal Reserve Bank of Boston.

Another advantage: "With credit scoring, [a business loan is handled] more like a consumer loan," says Jones. "The [bankers] book it, put it on a repayment schedule, and don't touch it unless there's a problem."

But the formulaic, impersonal nature of credit scoring means less flexibility as well. "Someone with no collateral or a blemished credit history will be [eliminated] by credit scoring," says Rosengren. In addition, if the business owner encounters problems over the course of the lending cycle, he says, a credit-scoring bank may be less sympathetic.