Banks remain the dominant financial service providers to small businesses, but nonbanks are doing their best to change that.

More and more nonbank competitors see money-making opportunities in serving small businesses and are chipping away at the more traditional providers.

Insurance companies, financing companies, leasing companies, and securities firms are initiating aggressive marketing campaigns and adding weapons to their small-business arsenals.

Of businesses with annual revenues of $500,000 to $10 million, 57% had a relationship with a nonbank in 1996, according to a survey that Tampa-based Payment Systems Inc. conducted earlier this year for American Banker. The results from that survey are covered in this special package of articles.

The proportion of small businesses using nonbanks for at least some services has jumped from 52% in 1994 and 49% in 1988, according to studies conducted by Payment Systems in those years.

"It's a race," said George Fore, vice president of corporate marketing for Advanta Business Services, a subsidiary of Advanta Corp., which is branching out from credit cards and home equity lending. "Everybody's finding out that small business is a good market."

"We want to be the financial service provider of choice for small businesses," said John Canning, president of business financing for AT&T Capital Corp., a small-business leasing powerhouse that has moved into other lending areas in recent years. "We're bringing things together to improve opportunities for small business."

The good news for commercial banks is that virtually every small business in the country has a relationship with at least one of them, but the field is getting more crowded.

"Banks are seeing more of the nonbanks now than they did before," said Cynthia Glassman, managing director of Furash & Co., a Washington- based consulting company. She published a study on nonbank inroads three years ago and is preparing another one.

Bankers in the trenches seconded her observation.

"I see more nonbank competition than before," said Steven D. Hickman, director of small-business banking for Barnett Banks Inc., Jacksonville, Fla.

Nonbanks have an edge because they generally concentrate on a particular product, making it hard for more diversified banks to match their specialized expertise, officials on both sides said. The result: While banks hold on to their sizable share of total relationships, nonbanks skim off desirable pieces of business.

"They do what they do extremely well because they focus on one thing where the banks try to do more," said Robert M. Kottler, senior vice president of small-business banking at Hibernia Corp., New Orleans.

The Payment Systems survey said 27% of the small businesses that use a nonbank are seeking specialized services such as leasing or asset-based lending. Fifteen percent of small businesses go to nonbanks for more flexible credit arrangements, and another 18% for better pricing.

Leasing companies are the most popular type of nonbank, with 25% of small businesses using them. Conversely, only 3% of small businesses go to banks for lease financing.

Leasing companies have the banks beat because they generally offer easier applications, faster turnaround times, and a wider array of products.

"We take the credit process down to the quick and easy," said Mr. Canning at the AT&T unit. "We can approve a credit for up to $50,000 with five or six pieces of information."

Brokerage firms are used by 16% of small businesses, and bankers view Merrill Lynch & Co. in particular as a growing threat. In a 1996 survey by the Consumer Bankers Association, 58% of banks expected Merrill to be one of their biggest competitors over the next five years.

Merrill officials declined to comment on their Working Capital Management Account, which offers a host of credit, planning, and insurance services. But bankers said Merrill cherry-picks older, more profitable accounts away from them.

Insurance companies provide services to 13% of small businesses and commercial finance companies to 13% according to the survey. The largest SBA lender last year wasn't a bank but was Money Store Investment Corp., which pumped out $457.1 million in loans.

Nonbanks have a reputation for marketing savvy that exceeds the banks', and marketing can be the difference between winners and losers in a crowded market.

"As a general rule, nonbanks are distinctly more advanced in the use of data and neural network analysis and marketing," said Allan C. Bloomquist, senior vice president of Oxxford Information Technology, Rockville, Md.

"Banks are stuck with a brick-and-mortar distribution system, but we're not," said Mr. Fore of Advanta. "We're direct marketers."

Indeed, Advanta has been honing its target-marketing and direct-mail skills for years, while other banks are just getting their feet wet, Mr. Fore said.

A growing number of nonbanks are diversifying their products and services with an eye toward building more of a relationship with small- business customers, which could be ominous for the banks that have historically fallen back on their full-service charters.

"Most nonbank financial players we see are concentrating on a niche, but we're starting to see more relationship-oriented approaches," Mr. Hickman said. "The products are expanding and will continue to do so. I don't see any sign of them slowing down."

AT&T Capital started out as a leasing company, moved into lending, and three years ago started doing Small Business Administration credits. One of its earliest SBA loans was for $1.7 million to Mendham Country Day School, Basking Ridge, N.J., to develop its day-care facility.

"We saw the SBA opportunity as an additional service we could provide to our business base," Mr. Canning said. "We have invested a lot of time and effort and have built a large infrastructure."

In early 1995 AT&T Capital continued its evolution by becoming active in asset-based lending. That venture has originated about $70 million in loans, Mr. Canning said.

AT&T Capital isn't the only company to have expanded from a leasing base. GE Capital last year started getting active in SBA lending.

Last year's name change of the Advanta small-business unit - to Advanta Business Services from Advanta Leasing Services - indicates more new products are in its pipeline, Mr. Fore said.

"We would not have changed our name if we didn't see we can provide more credit services than leasing," Mr. Fore said. Last year Advanta Business Services originated $251 million in small-ticket leases.

American Express Co., the largest issuer of corporate and business cards, is showing signs of broadening its offering to smaller companies beyond the basic charge card. It has been experimenting with a revolving credit card, testing preapproved lines of credit in conjunction with Banc One Corp., and offering small-ticket leases with Advanta.

American Express also has been selling accounting services to small companies.

"In the last couple of years it has been clear to us that the opportunity with small businesses is large and continues to get bigger," said Steve Alesio, the New York-based company's president of small-business services, consumer travel, and government cards. "The road we're on is to provide more sources of credit to small businesses."

Mr. Canning said if banks want to remain players in the small- business fray, they must invest long-term in the necessary technology. He is not sure many will.

"To succeed in this, you need focus and you need to invest in technology; you just can't throw people at it," he said. "I don't know whether the major banks are willing to make that investment."

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