March 29, 2024

You’re the Boss Blog: 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

Square Feet | The 30-Minute Interview: Andrew Heiberger

Q Did your noncompete clause with NRT expire just before you started this new company?

A Yes there was a noncompete when I sold the company, but I’m not allowed to legally disclose the terms of my contract with NRT.

Q So now you and Gary L. Malin, the current C.E.O. of Citi Habits and your former roommate at the University of Michigan, are competitors.

A We are competitors in some instances, yes. But I don’t necessarily look at it as competing. I look at it as providing additional services that are necessary for this market. It’s a huge marketplace — in Manhattan, there are 29,000 buildings.

Q Are the two of you friendly?

A I consider Gary to be a very good friend.

Q Town Residential seems to have grown a lot in a short time.

A We have about 40 employees, fully staffed; and we have, I believe, about 140 representatives licensed and working here. We have four offices, including two locations that just opened in the last few weeks. The first location was 110 Fifth Avenue; the second was 88 Greenwich; the third was 730 Fifth Avenue; and the fourth, 26 Astor Place. My headquarters will be 730 Fifth.

Q How is business?

A I think we’re off to a remarkable start. You can visit our Web site to see for yourself. We’ve listed over $250 million of real estate for sale and we’ve gone to contract and closed on a very significant dollar value. I’m not going to release the exact dollar volume.

We’re doing very significant rentals. We have secured, for example, the Moinian account as an exclusive marketing and leasing agent for 1,400 units. We recently secured a building called the Constable in SoHo.

Q Was it hard getting started without an official multiple listing service?

A Rebny began its virtual office Web site, or VOW, and through VOW all the listings in Manhattan are available as long as you abide by certain rules. Town has a very well-executed virtual office Web site — you can see every single exclusive by going to our site. It gives us full level playing field and access to all listings.

We’re not in the business of selling information anymore. We’re in the business of servicing clients — showing them property and educating them on what neighborhoods are right for them or whether the property fundamentals are right, whether condo or co-op financials are accurate, and advising on the negotiation process.

Q What percentage of your business is rental versus sales?

A It’s too early to tell at this particular point in time. My business model says that 85 percent will be sales and 15 percent rental.

In researching the market again, I learned that very few rental-only agents make a living, and I didn’t want Town to be a churn-and-burn business. I wanted it to be a place where somebody could hang their hat and begin their career, continue their career, graduate their career and end their career after successfully making a lot of money.

Q What have you learned from past experiences?

A Well, one thing I learned in my development business is that Manhattan is a luxury market and people here will pay for luxury and want to be serviced all the way through. I learned that amenities are in demand.

Q Are you focusing on luxury?

A We’re focusing on Manhattan for now, and in order to service Manhattan you have to be able to sell the $14 million house or condo and rent the $3,000 apartment to that person’s offspring.

Q You’ve taken in an equity partner, Thor Equities.

A Thor Equities is a capital partner. I’ve been partners with Joe Sitt before; this is my third time around. He and I see eye to eye on the business plan for Town.

Q Moving on to Buttonwood. That company successfully developed the condo conversion at 88 Greenwich Street. Will there be any more projects anytime soon?

A I have my hands full and am focused 110 percent on Town Residential. We’re not looking to develop right now, no.

Q Where do you expect to be a year from now?

A Sitting right in the same chair. I intend to be much further along than I am now and be considered a top-five-or-less player.

Article source: http://feeds.nytimes.com/click.phdo?i=5faf792bfd8c6f6eff8b3b0394cf9e5b