April 20, 2024

The Agenda: A Banker Explains Why Some Small Businesses Have Trouble Getting Credit

The Agenda

How small-business issues are shaping politics and policy.

After a recent post about the bad news embedded in the Federal Deposit Insurance Corporation’s second-quarter good news — business lending broadly was up for the first time in three years, but small-business lending continued to fall — The Agenda heard from a representative of Sterling National Bank, a small institution based in New York City that lends exclusively to small and medium-sized businesses. Contrary to what I had reported, loans were way up at Sterling, the representative said. Did I want to find out why?

I did. But what I learned was not as clear-cut as my correspondent had suggested.

Sterling, as the president, John Millman, tells it, was established in 1929 — “a very difficult year” — by a handful of businessmen who felt that the city’s small and mid-size companies “were under-served by larger banks in the marketplace.” (Among the founders was an owner of Arnold, Constable Company, the famed New York department store of the time.) The bank, Mr. Millman said, makes no consumer loans but offers businesses — today’s clients are mostly professional services — an unusual range of products for a community bank, including asset-based lending, factoring, trade financing, and until recently leasing.

While the banking industry increased total business lending by less than 3 percent in the second quarter, Sterling bolstered its own by nearly 10 percent. “Most banks have not been seeing growth in the loan portfolio, and they are saying that they’re not seeing loan demand,” Mr. Millman said. Sterling claimed to see a different picture. For one thing, the bank’s existing clients were starting to bite off a little bit more of their available credit line, he said. “But the very big area for growth for us are new relationships. Many traditional lenders to what we call small and mid-size companies have either lost interest for various reasons in the marketplace or they have merged up into much larger institutions and they can’t focus on that particular sector.

“We have been able to pick up many really significant client relationships the last several quarters, and they come to us largely from banking relationships that they’re unhappy with.”

Sterling has received some press coverage about the growth in its small-business lending. And that’s fair enough. But the key phrase here may be Mr. Millman’s qualification, what we call small and mid-size companies. For Sterling, those are companies with revenues that start at $4 or $5 million and reach as high as $100 million and who borrow as much as $20 million. In the category of what the F.D.I.C. calls small-business loans — financing of $1 million or less — Sterling’s portfolio actually dropped 3 percent, a steeper decline than in the banking industry as a whole.

In fact, since 2003, when the F.D.I.C. began collecting small-business loan figures, the small-business share of total commercial and industrial lending at Sterling has fallen, from 26 percent to 19 percent. At the nation’s biggest bank, by assets, JPMorgan Chase Bank, the small-business loan portfolio constitutes a slightly larger share of total business lending than at Sterling.

Mr. Millman acknowledged that Sterling now makes fewer small-business loans (or perhaps business loans that are small), “but that had never been a significant part of our lending,” he said. “Our core strategy is to work with larger, more established companies that borrow up to $20 million. While we did some very small business lending, we have determined that it makes much more economic sense to us and to our shareholders to focus our resources into larger relationships.

“You can even do the arithmetic,” he continued. “The resources required to make a $10 million loan are not a lot different than the resources required to underwrite, administer, and make a $1 million loan. If you’re trying to grow your loan portfolio by 10 percent, and you have over a billion-dollar loan portfolio, you’re going to make a lot of $400,000 loans and you’re not going to get there. But if you’re making $20 and $25 million loans, you’re more likely to get the loan growth. And that’s the strategy we have employed.”

We have heard others say that big banks have difficulty with small loans — though it’s rare to hear a banker acknowledge it. But Sterling is hardly a big bank — with about $2.5 billion in assets, it ranks 283rd. It is almost an axiom of banking that big banks are interested in transactions and use computer credit models to underwrite their small loans, while small banks are interested in borrower relationships and underwrite their loans manually. Mr. Millman, though, seemed to say that only the smallest banks would be able to treat the smallest businesses like people, rather than numbers. “It’s pretty hard for a bank that’s bigger than ours, I would think, to make lots of $500,000 loans and to say it’s a relationship business,” he said. “I don’t see how you can have a relationship with that many units.”

I asked Mr. Millman why he had wanted to talk to me, given that Sterling’s experience wasn’t exactly a counter-example to the broader trend I reported on. “We’re a $2.5 billion bank in the biggest banking market in the world, and folks at The New York Times don’t normally focus on community banks in a market that’s this big,” he said. “And to us it’s important to speak to as many people as we can to let them know about what we’ve been doing the last 80 years and who we are.”

Where would he recommend people who want $1 million loan go to get one, I asked. Sterling National Bank, he answered: “The experience will be much better at an institution like ours at that dollar level than at any other institution I can think about.”

But when asked where borrowers seeking smaller loans — $500,000, say — might go, Mr. Millman had no similar advice. “I honestly don’t know the answer to that,” he said.

Article source: http://feeds.nytimes.com/click.phdo?i=87207ee4245a924acdefd39dafc641f8