Bankers are scrambling to satisfy small businesses' growing hunger for specialized types of financing.
Small businesses are almost twice as likely to be drawing down lines of credit than taking traditional term loans, and they are demanding more tailored loan products, according to a survey for American Banker by Payment Systems Inc.
Leasing, once a backwater for banks, is becoming almost as prevalent as straightforward lending.
As small businesses seek financing that they regard as better suited to their operating needs, banks are acquiring leasing and other specialized companies to keep their hold on the small-business niche.
"We're seeing a change in the marketplace," said Jerry L. Bowman, executive vice president of the business banking division of BankAmerica Corp., San Francisco. "For businesses between $500,000 to $5 million (in annual sales), there's no doubt we're seeing less term loans."
The Payment Systems survey, which is the subject of a special report in today's Management Strategies pullout section, said 62% of small businesses were using lines of credit this year, up from 57% in 1994. Also, 13% of the businesses had two lines established; 8% had two lines in 1994.
Meanwhile, 37% of the businesses have an outstanding term loan to pay off, down slightly from 39% in 1994.
Maria Erickson, a research director at PSI, said comparable figures were not available for 1995.
What's more, the percentage of businesses that expect to borrow within 24 months has fallen steadily over the past three years, the research firm found.
Bank One, Texas, has been a pioneer in marketing to small businesses and has noticed the same trend, said Robin Wantland, senior vice president of the Banc One Corp. subsidiary.
"We're seeing a significant increase in line of credit extensions in Texas," he said. "Over the past four years we have watched the numbers of term loans versus lines of credit that we have originated, and the finding is consistent" that more businesses are opening credit lines.
Bankers see a number of factors behind the rise of lines of credit. Mr. Wantland pointed to the smaller capital needs of service-oriented businesses that increasingly dominate the small-business sector.
"We're seeing more service-oriented businesses and less in manufacturing and wholesale," Mr. Wantland said. "Service businesses are less capital- intensive."
Robert M. Kottler, senior vice president at Hibernia Corp., New Orleans, said some of the shift is attributable to bank strategic changes in recent years. Hibernia is one of a growing number that, aided by credit scoring and automation, are marketing credit lines that require minimal documentation and can be cranked out relatively cheaply.
"We're turning our customers more toward lines of credit than term loans over the past couple years because of costs," Mr. Kottler said. "Small businesses are very conservative and practical. If you manage your accounts properly, you can use lines of credit" to finance the business.
There will always be businesses that need term loans, bankers said. Of businesses with outstanding loans, 39% have a mortgage, the survey said.
Bankers pointed out that small-business owners frequently take out term loans to consolidate the personal debts they accumulated in building their companies.
Also, companies looking to grow are going to need more than a credit line to meet their needs, said PSI's Ms. Erickson.
"Growth companies are the ones that want to borrow" on a term basis, she said.
The survey found that bigger small businesses are more likely to use term-loan financing than smaller ones. Of companies with $5 million to $10 million in annual revenue, 42% had an outstanding loan this year, compared with 36% of those with less than $1 million in revenues.
Companies further down the revenue scale more typically sought alternative sources of financing. For example, credit cards are used by 11% of small businesses.
As term loans have diminished, equipment financing and leasing have made strides - albeit uneven ones - during the past few years, according to the survey and historical information.
In 1996, 30% of businesses leased equipment, down from 36% last year but up from 26% in 1994, PSI said.
Equipment financing has had a similarly irregular recent history. Currently used by 10% of small businesses, equipment financing was used by 6% last year and 9% in 1994.
Nonbanks are tough competitors in equipment leasing and other financing for small businesses. The survey found that one-quarter of small businesses use a leasing company. Taken together, leasing companies, finance companies, and other nonbanks control 45% of the equipment financing market.
Banks recognize this and are trying to respond, as reflected in their recent spate of leasing company acquisitions.
Eastern Bank Corp., a $2 billion-asset company in Malden, Mass., acquired a small leasing company in May because it believed that demand would keep growing, said executive vice president Robert E. Griffin.
"Leasing by small businesses has been growing," he said. "We see an excellent opportunity in the market."
Among larger banking companies, National Commerce Bancorp., Mellon Bank Corp., First Union Corp., and Centura Banks Inc. have acquired leasing companies in recent months. KeyCorp recently reengineered its small- business leasing service.
Small businesses like leasing because it lets them conserve capital, keep pace with technology, and manage their money, Mr. Griffin said.
And he views the future as promising. Eastern Bank's acquired lessor had $1 million of receivables at the time of the deal and now has as much as $6 million in the pipeline.
The leasing product is promoted through branches and by brokers, and Mr. Griffin said the bank would consider buying other leasing companies.
"It is a business line that I want to ramp up," he said.