Commercial banks don't have a lock on the small-business loan market, a Federal Reserve Board study indicates.

And that may be good news for banks, in a roundabout way.

As evidence that commercial banks may have lost their dominance in lending to firms with fewer than 500 employees, the Fed study adds fuel to one of the raging controversies in bank merger policy.

Preservation of local small-business credit has been one of the principal concerns of the Federal Reserve Board and the Justice Department in examining proposed mergers. In some cases, the Justice Department has held up antitrust clearance until small-business lending commitments could be assured.

Some observers, arguing on behalf of banks seeking or likely to apply for merger approvals, say that it's time for the feds to ease up.

The recent Federal Reserve study, based on a 1993 sampling of 5,300 small businesses and published in the board's July 1995 bulletin, said 41% of the companies obtained credit lines, loans, and leases from depository institutions. Isolating commercial banks, their share was 37%.

But 19% got credit from nondepository providers such as finance companies, leasing companies, and brokerage firms, and 14% went to "nonfinancial suppliers" such as family members, other businesses, and government agencies.

A full 45% of small businesses did not borrow from any of these sources. Only among firms with at least 20 employees, or with annual sales of at least $2.5 million, did as many as eight out of 10 take out credit. About seven out of 10 in those categories were bank borrowers, more than 30% went to nondepositories, and 15% to 20% borrowed from other sources. (Percentage totals exceed 100 because many companies have multiple lenders.)

If banks are far from being the sole source of small-business credit, and if a bank merger would therefore not affect the overall loan availability, perhaps federal antitrust scrutiny need not be so tough.

Meanwhile, banks have plenty of room for market-share improvement.

"Small-business lending was purportedly the last bastion of bank dominance," H. Rodgin Cohen, the prominent bank lawyer and partner at Sullivan & Cromwell in New York, said last month at the American Bar Association's annual convention in Chicago.

While antitrust authorities may be assuming that a bank merger makes the small-business market less competitive, Mr. Cohen said, "it is actually a multiple-source market."

Some of those sources are aggressive commercial banks. Mr. Cohen pointed out that in the competitive analysis of small-business lending in Portland, Ore., and Seattle, which are affected by U.S. Bancorp's merger with West One Bancorp, NationsBank and Bank One had bigger shares than some local institutions.

"Commercial customers are no longer restricted to nearby branch locations," he added. "Now out-of-market banks compete."

The bad news for banks, if the nonbank trend continues, is that small business could go the way of other former industry strongholds like the large-corporate loans that have given way to direct borrowing from the commercial paper market.

On the positive side, 95% of small businesses have "liquid asset accounts," such as checking and savings, and 86% of them go to commercial banks, compared with 4% for nondepositories. Thrifts and credit unions register 12%.

Some 35% of the firms obtain cash management and other financial management services, and commercial banks claim 26%. Among companies with 100 to 500 employees, those percentages rise to 76% and 67%.

Still, the Fed data could reopen some arguments about small-business lending's centrality in antitrust analysis.

Its status was defended in October 1990, when the Federal Reserve Bulletin reported on the small-business banking survey of 1988-89. "Local commercial banks are still the main suppliers for most of the financial services used by small and medium-sized businesses," the article said. "Nonbank institutions, whether local or not, rarely supply such an array."

In the March/April 1995 edition of the Federal Reserve Bank of Atlanta's Economic Review, economist W. Scott Frame explained that the market for unsecured small-business loans has been regarded as relatively untouched by other nonbank-competition trends. This justified the Justice Department's "disaggregating" small business from the traditional "cluster" of banking services, as defined in a 1963 Supreme Court case (U.S. v. Philadelphia National Bank) that has influenced merger policy ever since.

Despite complications in data gathering, "theoretical and empirical evidence has confirmed that ... unsecured working capital loans are provided almost exclusively by local banks," Mr. Frame wrote.

"As a result, geographic markets for these loans are generally defined more narrowly than those for the cluster of banking products and services, resulting in greater market concentration" - which piques the antitrust authorities' interest.

Commercial finance and factoring companies have made inroads in secured lending, Mr. Frame said. Banks have retained - and have a "comparative advantage" in - unsecured lending that requires continual monitoring of the borrower's condition.

But even in 1990, Fed analysts Gregory E. Elliehausen and John D. Wolken suggested that "economic markets for certain services, especially leases and motor vehicle loans, include nonlocal and nonbank financial institutions and hence justify a broader market definition for these services."

According to the 1995 Federal Reserve Bulletin article by Rebel A. Cole and Mr. Wolken of the division of research and statistics, captive finance companies have had a major impact in some markets. Among transportation companies in the latest survey, which are heavy users of motor vehicles, 26% borrowed from finance companies - twice the average for all firms.

High rates of commercial bank usage for credit services - above the 37% benchmark - correlated more with company size. Among standard industrial classifications, transportation led at 49%, followed by wholesale trade at 45%, "other manufacturing" at 44%, and primary manufacturing at 41%.

Proprietorships were the least likely to use commercial banks, at 27%, but 3.37% of them borrowed from credit unions, significantly above the average of 2.34%.

The 1993 survey pointed to "anecdotal evidence" that many small businesses get financing through owners' credit cards, sometimes with banks' encouragement. The survey did not delve into which institutions issued such cards, but four out of 10 companies used personal credit cards and three out of 10 used business credit cards.

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Zions First National Bank of Salt Lake City has received Small Business Administration approval to take its Preferred Lending Program across the country.

The SBA-sanctioned program streamlines the processing of loan applications by institutions that meet certain standards. The lead subsidiary of $5 billion-asset Zions Bancorp. sought authority to extend the SBA activity, previously confined to Utah, to major metropolitan areas.

The strategy stems from Zions' hiring this year of Anthony J. Feraro to head the bank's small-business finance division. Mr. Feraro, who has a mandate to boost SBA 7(a) lending nationwide, set up shop in St. Louis, where he previously headed ITT Small Business Finance. He chose to join Zions when ITT Corp. sold its operation to GE Capital.

Harris Simmons, president and chief executive officer of Zions Bancorp., said the expanded preferred-lender authority "will further Zions' goal to provide superior service to small businesses in every market the bank serves."

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