A reporter in the online department of a major business magazine called me and asked if banks are more dependent on small and midsize business than they used to be.

Absolutely, I told her. Larger borrowers can get funds from the capital market, from investment banking firms, and even directly from their suppliers. So yes, banks are more reliant on the smaller companies that lack these alternatives.

"Then why aren't the banks soliciting these borrowers by giving better terms on their loans?" she asked. "Why do so many small-business borrowers get the credit they need through credit cards?"

A good question. It is amazing how many businesses rely on credit card loans that can cost as much as 18% or more a year, when bank loans would be so much cheaper. The reporter told me that a number of the businesses she had contacted use several cards - moving from one to the next when the first is maxed out.

I told her that this practice helps explain why borrowers often seem in perfect shape until they suddenly go bankrupt.

In the past, a company that got into financial trouble would slow down its debt payments, and this would serve as a warning to lenders. But now some businesses simply get a new card with a low initial rate. They keep moving from one to the next - using the proceeds of the new loan to pay the monthly minimum on the older ones - until they run out of banks willing to give them another card, and their entire credit structure collapses.

"But why are these borrowers willing to pay so much for credit?" the reporter asked.

I explained that for many small-business borrowers, the availability of credit is far more important than its price. The borrower cannot make money on an operation if he or she cannot get the funds to get started.

Let's say that a company turns over its operating funds (both borrowings and capital) six times a year and expects to make a 15% spread on each turnover. That company is not going to complain about paying 18% a year for money when it expects to make 75% a year on its operation.

This is why so many borrowers prefer a quick "no" to a slow "yes" - it gives them time to go elsewhere and try to get funding while there is still an opportunity to use it profitably.

I told the reporter that many banks don't lower their loan rates because so many borrowers don't care as much about the rate as they do about the loan's availability. This is why so many companies rely on credit cards and home equity loans for their funding, despite the high cost.

But this situation presents a real opportunity for community banks. Many small businesses do care about credit cost. And as one longtime banker said to me years ago: "Watch out when a borrower doesn't argue over the rate. That means he doesn't plan to pay back."

Every time I talk with small-business owners about their banking relationships, I find they want three things: individuals who know them and can handle requests without having to be reeducated every time, a quick response to requests, and a rate that is only modestly over prime. Community banks can provide all of these.

My discussion with the journalist reinforced my feeling that many business borrowers could be wooed away from their current banks - and could bring with them profitable balances - if they knew that a new bank might be willing to provide credit quickly and at a reasonable price.

Small-business borrowers should not have to rely on finance vehicles - consumer vehicles, in other words - that are not designed for them.

Mr. Nadler, an American Banker contributing editor, is professor of finance at Rutgers University Graduate School of Management.

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