Confessions Of An Ex-Banker-And The Lessons Learned Along The Way

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Many community banks ignore them, unless they want to borrow $250,000 or more. Large regional and global lenders funnel their loan applications through an automated credit scoring machine rather than make the effort to establish a personal relationship. Internet-based loan brokers feed them, for a fee, to huge financial services providers who want only to build loan totals. Who are they?

They're America's small business owners-those hard-working entrepreneurs who more often than not have a difficult time establishing full-service banking relationships if they don't need to apply for credit in amounts large enough to make it "worth the effort" of most financial services providers. They are those small business owners who are in the early-to-mid-stages of their business life cycle, or those who have been in business for several years but have very limited borrowing needs, or those who have reached the point at which they must decide how to retire from the dawn to dusk, six-day work weeks of small business ownership.

They are at the same time the fastest growing sector of the American economy and the financial services industry's "nouveau-underserved." "They" will be examined in this, the first of a multi-part series to appear in The Credit Union Journal.

Many of America's small business owners are existing credit union members while others represent potential membership with significant growth and profit opportunities. What do they look like?

Putting a Face on Small Business: Four Examples:

Ramon Zamora ran a small division responsible for the manufacture of electronic parts for a large aircraft manufacturer for more than 15 years only to find himself "downsized" when large sales orders were cut and revenue projections slashed. Turned down by his bank for a small business loan to start his own company, Ramon took out a home equity loan and used his personal credit cards to begin manufacturing the same electronic parts out of a small rented warehouse. Within a few short years the company moved to much larger facilities and now generates millions of dollars annually, providing the same electronic parts to the same company for which he used to work as an employee.

The First Immigrant's Story

Indira Pangyang came from India in 1978 to reunite herself with her husband and, like many immigrants to the Los Angeles area, began working in the garment industry. Wanting more in life than what was offered, she educated herself in business and started FairSeas Travel, Inc., from her kitchen. She also took advantage of the technology industry boom and targeted both Philippine and Indian consumers.

Ten years later, the travel venture stands stronger than ever. Despite the economic slowdown and effects of Sept. 11, the company grossed $15 million in sales last year and has diversified its services to include cruises and corporate travel packages.

When Rod Sanchez was downsized out of his job, he and his wife, Lucinda, decided it was time to stop the talking and turned their vision of owning a company into reality. While Lucinda kept her job, Rod set out to find a business they could buy. Through networking with some brokers, they finally found Central City Containers. The Sanchezes cashed in their savings, got a loan from relatives and bought the company. A full service manufacturer of shipping cartons, Central City Containers experienced an incredible 35% growth in its first year and grossed $2-million in sales for 2000.

The Second Immigrant's Story

Mike Weng came to the United States to further his education. He had a degree in chemistry from his native Singapore, but saw increasing opportunities in the computer business and worked to obtain his masters in computer science. His expertise and knowledge of systems applications landed him a top position of manager of security systems for a major corporation, but he felt he didn't get the respect he deserved because of his poor communications skills. He resigned to start his own computer software and programming firm.

One of his first clients was his former employer. In the first year he grossed $1.1 million and this year he projects gross revenues of $15 million. With more than 100 employees and clients such as Sony, Universal, Farmers Insurance and Honda, Mike hopes to maintain a growth rate of 25% each year.

What do these small businesses have in common?

(a) They are all women- or minority-owned businesses

(b) They are fewer than four (4) years old

(c) The owners were denied business loans by their banks

(d) All of the above

The correct answer is (d)-"all of the above." Each of these small businesses represents the fastest growing-and most underserved-segment of Small Business America, a market that is systematically ignored by a majority of financial services providers. Today, these are all million-dollar businesses and bankers are chasing them for their loan and deposit relationships. But to whom could they turn for capital when they really needed it?

The Story of a Young College Student

I have another story to tell. When I met Michael Cobler, he was a young college student-an entrepreneur who had opened a very successful sandwich shop near California's San Jose State University in 1971. One day in 1974, he walked into my bank and inquired about a loan to convert a vacated residence across the street from a major shopping center into his second sandwich shop. I said "no." "Not enough experience in the sandwich shop business," I reasoned. "Don't want to convert your sandwich shop back to a single family residence when you go belly-up," I snipped. "Too risky," I rationalized. ("What a dumb idea." I really thought).

"Can't see the vision," Michael sighed as he walked out of the bank. Today, Mr. Cobbler's Togo's Eatery is part of the Baskin-Robbins/Dunkin Donuts family and operates 385 locations in 19 states.

I often reflect on that meeting with Mr. Cobler, asking myself a series of soul-searching questions, such as:

* Did he have a business plan? (I never thought to ask him; a sandwich shop is too much like a restaurant and nobody makes loans to restaurants).

* How much of his own money was he willing to put in the deal? (I was too hung-up on the fact that he was a college student, not an experienced businessman. Of course, I never asked about his previous three years' experience in Store No.1).

* What were his projections and how realistic were they? (I never got that far into the discussion -I just summarily dismissed the applicant).

If I had asked any of these questions, I might have learned that the original sandwich shop quadrupled its sales in the first year and was quite profitable.

I might have ascertained that the cash flow generated by the original shop was sufficient to sustain not only its operations but also to take on the additional burden of a second shop until such time as the new location would become profitable on its own.

I might have sensed that Mike Cobler had the financial wherewithal to create one of the most successful chains of sandwich shops in America.

An Historic Paradigm Shift

In 1974, I was a wet-behind-the-ears loan officer. Twenty-eight years later, as much more experienced lender, former bank president and industry consultant, I've witnessed a steady deterioration in the level of service extended by banks-large and small-to their small business customers.

The landscape is changing once again. Twenty years ago, the nation's largest lending institutions realized that small business lending is very profitable. Until the last few years, the banking industry dominated the small business lending market. Then a host of non-bank lenders entered the scene and the competition became even more intense. In time, the advantage shifted to those lenders who could provide the most expedient access to capital supported the best package of small business-related financial services. Community banks, long the home of the small business owner, took "loyalty" for granted and began losing their grip on the market.

Contributing Factors

Several factors have contributed to this: Centralization of credit underwriting, automated loan decisioning processes, elimination of training programs, shortage of qualified commercial lenders, and a commercial bank focus on larger companies with bigger borrowing needs have left a majority of small business owners searching for a new home for their business borrowing and deposit requirements.

Today, small business loans of $50,000 or less are generally available from brick-and-mortar, click-and-mortar and dot-com institutions that use small business credit scoring models and provide decisions in just a few hours or just a few days. However, there is a huge demand for loans from $50,000 to $250,000 for long-term equipment financing or short term working capital needs. Although these credit requests represent a source of very profitable relationships, they are frequently ignored by lenders who prefer to allocate their resources toward larger small business and middle market loans.

This multi-billion dollar market is literally "up for grabs" and the credit union industry is presented with the opportunity of a lifetime. And make no mistake; even the small business owner who has gone to the Internet for access to capital would rather have his total loan and deposit/investment relationship with one financial services provider in his local community. How can credit unions capitalize on a profound member business services opportunity?

Mike Hales, a "recovering banker," is Director of Member Business Services with Counter Intelligence Associates of San Juan Capistrano, Calif. Mr. Hales can be reached at 800-424-4951 or at mike counterintel.com.

Look for the next installment in Mr. Hales' series in an upcoming issue. The CU Journal welcomes reader input at any time.

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