United States. Congress. House. Committee on Small.

The effects of bank consolidation on small business lending : joint hearing before the Subcommittee on Taxation and Finance and the Subcommittee on Government Programs of the Committee on Small Business, House of Representatives, One Hundred Fourth Congress, second session, Boston, MA, March 4, 1996 online

. (page 15 of 21)
Online LibraryUnited States. Congress. House. Committee on SmallThe effects of bank consolidation on small business lending : joint hearing before the Subcommittee on Taxation and Finance and the Subcommittee on Government Programs of the Committee on Small Business, House of Representatives, One Hundred Fourth Congress, second session, Boston, MA, March 4, 1996 → online text (page 15 of 21)
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to continue to grow. There are varying levels of management sophistication among small
business owners; with many needing much more support and direction than others.

In short, small business lending is a unique and very labor intensive type of
activity for banks and many banks are simply not equipped or ready to devote the
resources to doing it well. I do not think I am stretching a point to say that a fifty
thousand dollar small business loan is not high on the profit agenda of a multi-billion
dollar institution. It takes no more effort, perhaps less, for them to extend a credit of a
million dollars or more to an established company with a strong financial statement. As
larger banks continue to dominate an increasing share of our market, the truly small
businesses are going to find it is even more difficult to get their attention and their
financial help.

That is not to say that some large institutions have not developed theories about
how to loan to small companies. The theory that seems to be currently in vogue is
something one might describe as a point-score system. The potential small business
borrower simply calls a designated number and talks to the bank's small business loan
center. The applicant is asked to provide some fairly rudimentary financial information
and if it passes muster, a loan of up, to $100,000 may be approved. This theory says you
can automate small business lending. It is a great theory but it won't work.

A few minutes ago I said that small business lending is labor intensive. It is also a
highly personal kind of lending. If you are going to make successful loans to small
companies with leveraged financial statements, you have to know the people involved



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and be willing to work with them through the inevitable roller coaster ride that most small
companies experience in the early stages of their history. The first loan is easy to make.
You can probably do it through a loan center. But are the big banks going to give the
borrower an "800" number they can use on some Thursday afternoon when the company
suddenly discovers it needs help in meeting Friday's payroll because an expected
receivable didn't get paid? I doubt it.

It is not the fault of multi-billion dollar banks that they cannot effectively meet the
needs of small businesses. It is a by-product of their size and their multi-layered
organizations.

Small business lending is done most efficiently and profitably by small and
medium-size community banks. For these banks, small business lending is an important
part of their portfolio. These are relationship oriented institutions with experienced
lending officers who remain in place and develop extensive knowledge of the companies
that are their borrowers. However, I would be quick to point out that not all small
community banks have the talent or the stomach for a specialized lending function that
involves more than the usual amount of risk. Having said this, I should also comment
that from personal observation, it appears that a growing number of community banks are
beginning to engage in small business lending as a means of acquiring interest-sensitive
assets and reducing their interest rate risk. That is a positive sign for small businesses.

During the past few years, my bank, Danvers Savings Bank, has focused on small
business lending. We were the first mutual savings bank in the country to be designated a
"Preferred Lender" by the Small Business A


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Online LibraryUnited States. Congress. House. Committee on SmallThe effects of bank consolidation on small business lending : joint hearing before the Subcommittee on Taxation and Finance and the Subcommittee on Government Programs of the Committee on Small Business, House of Representatives, One Hundred Fourth Congress, second session, Boston, MA, March 4, 1996 → online text (page 15 of 21)