Medallion Financial Corp., led by the Murstein family with three generations of experience carting New Yorkers around town, knows a bit about the taxi business. The family owned as many as 150 taxi medallions before it started paring back in the 1970s and still owns 30 cabs.
Medallion, an outgrowth of the family's willingness to hold paper when it began selling, fits the profile of a successful small-business niche lender. By capitalizing on expertise in its field and making a long-term commitment to its market, the company is doing quite well for itself.
Analysts say niche lenders enjoy healthy margins because their customers usually can't shop too far and wide for rates. Moreover, borrowers stick with lenders who they know will stick with them.
"They're not going to go away when times are tough," said Erick J. Reim, an analyst with Piper Jaffray Inc. in Minneapolis who follows another New York specialty lender, Financial Federal Corp.
While banks might regard taxi medallion lending as risky, Medallion Financial's experience suggests otherwise.
"We've lent about $600 million since 1979 and have zero losses" among medallion-backed loans, said Andrew Murstein, president of Medallion and son of its chairman, Alvin Murstein. The company has $230 million of assets and makes $50 million of medallion-backed loans annually in New York and five other cities.
Common to most niche lenders are markets that require more monitoring than large banks can do efficiently, Mr. Reim said. Beyond that, their businesses are quite varied.
Financial Federal, which has nearly $600 million in earning assets, lends to contractors, trucking firms, waste handling companies, and other operators of heavy mobile equipment. It has offices in six states and loans outstanding in nearly every state. Most of its clients, said chief financial officer Michael Palitz, have lines of credit for general operating purposes with banks that are unwilling to finance their equipment.
Financial Federal mitigates the risk of its customers' failing by knowing the market for the equipment inside out.
"If someone drove a crane up to 399 Park Ave., I'm not sure Mr. Reed would know what to do with it," Mr. Palitz said, referring in jest to John Reed, chairman of Citicorp, which actually competes for some of the same business as Financial Federal. "We'd find someone to take it off our hands."
The Emergent Group, primarily a subprime residential mortgage lender based in Greenville, S.C., has a commercial division that concentrates on single-purpose specialty real estate such as hotels, car washes, and health clubs. Such real estate is risky because it can't be converted easily to other uses. But generous margins and intensive knowledge of the borrowers' business compensate, said Samuel J. Couvillion, chief operating officer of Emergent's commercial division, which booked $31 million in loans in the first six months of 1997.
For example, he said, his lenders are well versed in hotel industry occupancy rates, average daily room rates, and the relative quality of various national flags.
Although niche lending is often associated with independent companies like Medallion, Financial Federal, Emergent, banks of all sizes serve small-business niches too, especially when particular circumstances give them unusual resources.
Marine Midland Bank, for example, serves Indian subcontinent trading companies in the New York City area by drawing on its ties to sister companies under the umbrella of London-based HSBC Group. Through its various holdings, HSBC Group has long done business in India and with Indians in the Middle East, Hong Kong, and Singapore, said Peter Boland, senior vice president with Marine and head of its Asian business unit.
The unit, which was established in 1994, is staffed by Indian nationals, he said.
Mr. Boland declined to say how large the Asian unit is but said, "It's a relatively significant part of (Marine's) portfolio in the New York and Long Island area."
Though Medallion Financial appears to have demonstrated the safety in lending to taxi owners, its customers are unlikely to find much help at banks, Mr. Murstein said. They are typically immigrants who decided to buy a medallion after leasing one for a year or two, and who will sell out in three or four years.
"These people don't have audited financial statements," Mr. Murstein said, adding that most don't even understand what these basic requirements for a bank loan are. But the value of the medallion-$250,000 in New York, $100,000 in Boston and $50,000 in Chicago -provides nearly golden collateral. Medallions cost so much because their supply is fixed. New York City has had just under 12,000 medallions for more than 60 years.
Having raised $60 million in an initial public offering in May 1996 and another $80 million in a secondary offering in May of this year, Medallion Financial is looking for growth by moving into new cities where the fixed supply of medallions supports high prices. In addition, it is diversifying modestly by working in other niches.
It has a smaller line of business lending to dry cleaner and owners of coin-operated laundries in New York. It announced an agreement in August to acquire a commercial lender in Hartford, Conn., that specializes in loans guaranteed by the Small Business Administration. It also owns a business that sells advertising on tops of cabs.
Although the SBA business, Business Lenders Inc., will serve a broader array of clients, Mr. Murstein said it won't change Medallion's intent to avoid markets served by mainstream banks. With loans averaging $200,000 and a government bureaucracy to master, it is still niche lending, he said.
With loans averaging $70,000, the dry cleaning and laundry business also is unlikely to attract much bank competition. As with the medallion business, said Mr. Murstein, expertise in the underlying business is key.
"We know what someone should be paying per square foot for space," Mr. Murstein said, and will ask borrowers to renegotiate leases that are too expensive.
"Our strategy has been to target areas that banks have not been active in," Mr. Murstein said.
That works for many independent finance companies, Piper Jaffray's Mr. Reim said, because even when banks target niches, their interest in the market often wanes several years later. And when they buy independent finance companies to serve niches, they often find that can't keep expenses as low as the selling owners did.