Banking & Finance and Small Business

Banks find niche with small loans: Three new arrivals affecting local lending community

February 28, 2005

The city's small-business lending market is a bit more crowded now that three out-ofstate competitors have entered the fray.

McLean, Va.-based Capital One Federal Savings Bank, Oakland, Calif.-based Innovative Bank and Providence, R.I.-based Charter One Bank are wasting no time letting fellow lenders know they're serious about serving the small-business community.

Capital One, Innovative and Charter One ranked second, third and fourth, respectively, in the number of U.S. Small Business Administration 7(a) loans they dispensed during December. The leader for the month remained National City Bank of Indiana, which continued its dominance of the market in fiscal 2004 as the top 7(a) lender in the city.

National City again led the charge during the first quarter of fiscal 2005, which began Oct. 1. But for the first time, all three newcomers appeared on the list of top lenders, with Capital One a close second in terms of the number of 7(a) loans administered.

Only Charter One has a bricks-and-mortar presence in the metropolitan area. But that does not diminish the impression the other newcomers have made so far on the local banking community.

"We're certainly talking about [them], as are other banks," said Connie Shepherd, National City senior vice president and area sales manager in the Small Business Banking Group in Indianapolis. "There are so many individuals who are thinking about starting a business and need alternatives. The more competition, the better."

Still, Shepherd does not view Innovative and Capital One as direct threats because they entered the market with a credit product-meaning just loans-and do not offer additional business banking services. Businesses receiving loans from the two lenders will need a checking account, for instance, Shepherd said, and may look to National City to provide a full array of offerings.

While bigger banks such as Clevelandbased National City, Cincinnati-based Fifth Third Bank or New York-based JPMorgan Chase Bank, which purchased Bank One early last year, will lend smaller amounts, they traditionally are more interested in larger loans. Providing entrepreneurs with loans of $50,000 or less could create a formidable niche for the new arrivals, said Steve Beck, president of the Indiana Venture Center.

"They seem to be at the very beginning of the food chain," he said. "But I think that's beneficial to the market, because those types of loans have been a bear to get."

While Capital One made 47 loans under the SBA 7(a) program in the first quarter of fiscal 2005, the total amount was only $1.9 million. National City administered just 10 more loans than Capital One, but the total amount of its loans was $4.5 million.

Capital One is the nation's largest issuer of small-business Visa and Master-Card credit cards and the third-largest lender of SBA loans, in terms of volume, company spokeswoman Pam Girardo said. Its focus is small companies, which Capital One targets through direct-mail advertising, that have less than $1 million in annual revenue, she said.

Charter One's parent, Charter One Financial Inc., was acquired by Citizens Financial Group in Providence in August. Citizens is the largest SBA-backed lender in the New England region, a company spokeswoman said. Innovative did not return IBJ calls seeking comment.

But Gail Gesell, director of the SBA's Indiana district office, said Innovative's target audience is borrowers interested in the SBA's Community Express loan program. Under the program, the lender uses its own paperwork and retains control of the loan. Most important, the SBA does not require banks to take any collateral for loans up to $25,000. Moreover, business plans aren't necessary. Approval is based solely on credit history, and loans are authorized in as little as a day.

According to Innovative's Web site, the bank approved 2,217 SBA 7(a) loans in 2003, making it the fourth-largest 7(a) lender in the nation. Innovative's three lending levels are $5,000, $10,000 and $15,000, Gesell said.

"[Innovative] jumped right on the Community Express loan as a specialty market for [it]," she said. "[It is] going after the smaller loans. It's what startups have really wanted to pursue."

Indeed, loan sizes are beginning to dwindle. In 2003, the average size of an SBA-backed loan in Indiana, according to Gesell, was $176,153. That amount in 2004 dipped to $169,698. From the start of the fiscal year Oct. 1 to mid-February, the average loan size in Indiana was $139,549, Gesell said.

But while loan amounts may be sliding, loan volumes are spiking. The number has increased 29 percent so far this fiscal year compared with the same period a year ago, Gesell said.

The focus on smaller loans will cause larger banks to rethink any plans they might have had to abandon that market, Beck said. If they don't get them when they're small, he reasoned, they won't have the opportunity to do business with them later after they may have grown much larger.

Bill Cafaro, senior vice president and small-business financial services manager for Bank One, a division of JPMorgan Chase, concurred. While Bank One is even larger now, it's still interested in small-business owners seeking minimal lending, he said.

"We've always been a strong small-business lender," Cafaro said. "One of our big challenges is making sure we're always communicating that with the folks we're interacting with, because our competitors would like to tell them differently."

As president of the Venture Center, Beck admitted he's less interested in smaller companies unless they have potential for enormous growth. But when he receives inquiries from those types of businesses, he refers them to several banks.

For instance, Beck recently turned away an operator seeking a $100,000 term loan and a $50,000 line of credit because the request didn't meet the center's criteria. After consulting with a few banks, however, the surprised owner shared his good fortune with Beck.

"He called me back and said three [banks] wanted to talk to him," Beck said. "That floored him. He didn't think anyone wanted to deal with the small guy."
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