Merrill Lynch & Co., America's biggest brokerage firm, is moving forcefully to entice some small businesses from their banks.

"Merrill Lynch serves my needs better than my bank was doing," said Richard Schuster, owner of the Schuster Flexible Packaging Co., a Commerce, Calif., firm with $10 million of sales. "The are a little freer lending me money and their loan rates are the same as I would get from a bank."

Mr. Schuster used to give his business to Bank of Tokyo's Union Bank. But he was courted aggressively by Merrill's business financial services group, launched seven years ago.

From Skeptic to Booster

The businessman said he was skeptical when he received a cold call two years ago. But within a few days he signed on. He now borrows his cash-flow shortfall -- about $300,000 monthly -- through a Merrill Lynch line of credit.

Mr. Schuster still uses Wells Fargo Bank for local payroll disbursements and to store interday deposits. But it's sore comfort for Wells, because he transfers overnight balances to Merrill's financial services unit at the end of every business day.

In 1986, Merrill came up with its working capital management account for businesses with sales between $1 million and $250 million. (Most of its 300,000 small-business customers have sales of less than $30 million, officials say.) This year, the business financial services group expects assets under management to reach $100 billion.

More troublesome for banks: $561 million in lines of credit and $128 million of term loans that the brokerage giant has extended to cash-management business customers.

"We've seen our financing business increase 70% this year," said Richard A. Hanson, executive vice president of the business financial services unit.

A Flexible Sales Style

"They seem to understand small businesses better than the banks do," said John P. Obie, owner of Chicagoland Processing Corp., a $15 million firm that makes medallions for professional sports leagues.

Mr. Schuster complains that banks were poor relationship managers.

"Every time we wanted credit, we had to reconvince our bank of our worthiness even though we had shown a profit in every one of the 28 years we've been in business," he recalled.

Wait-and-See Bank Response

Some bankers are warning potential customers.

"Those customers might consider the problems they will have when they need a bank for something Merrill Lynch can't give them," said Douglas W. Ferris Jr., president of National Commerce Bank Services, Inc., Memphis.

Merrill, ironically, says former bankers are its best salesmen. More than 90% of the service unit's 45 financing specialists were bankers, Mr. Hanson said.

|Float' Appeal

They work with "our 11,000 sales people in 500 offices across the nation," Mr. Hanson said.

The money-market account, against which business customers can borrow, acts as the compensating balance for the line of credit. Merrill's customers collect interest, which the company refers to as "dividends," on cash-equivalent balances.

Banks do not offer this feature to entrepreneurs who use checking accounts for compensating balances. "We give the float back to the customer," Mr. Hanson said.

Many banks also sweep balances into interest-paying accounts at night, but they charge $200 to $300 a month for the service, Merrill claims.

The brokerage firm charges an annual fee of $150 plus 0.5% of any credit lines for its working capital management account.

Room for Expansion

Merrill says its loan guidelines are rigorous enough to protect against runaway credit problems. A company must be in business for at least 10 ears to qualify for a line of credit, and must show profits in two of its last three years.

Merrill also says that it will not lend to real estate companies or foreign-owned concerns.

Mr. Hanson said that Merrill, even with such restrictions, has tremendous room to expand. The business financial services group has grabbed only about 3% of the nationwide market it wants to serve, he said.

That share translated last year into $690.8 million of revenues, some of which came from related products offered by the small-business unit.

The average customer has "another $250,000 in related assets with us," outside of the cash-management account, Mr. Hanson said.

No FDIC Obligations

Mr. Hanson acknowledges a regulatory advantage over banks.

"We are lending money" without having to pay Federal Deposit Insurance Corp. premiums," Mr. Hanson said, and without having to devote time and planning to bank examinations.

Merrill even uses the nonbank pitch in sales calls.

"They explained they are able to be more flexible because they aren't operating under banking regulations," said Mr. Schuster. Although moving his funds to Merrill meant losing government deposit insurance, Mr. Schuster said he was not worried.

If he's right about the advantages of flexibility, banks had better guard their turf. Mr. Schuster said he has recommended the Merrill unit to three friends who own small businesses.

Ms. Adkins is a freelance business reporter based in Chicago.

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