Oft-Ignored Service Sector Viewed as a Gold Mine

Bankers who toil in the field of small-business lending might do well to discover a relatively untapped and growing market - firms that provide services rather than manufactured goods.

Oxxford Information Technologies, which specializes in research for banks, reported recently that short-term debt held by service firms is expected to increase 5.9% annually through 1994. That compares with a projected annual growth rate of 4.2% for all industries.

Oxxford officials report, however, that banks have been wary of service companies.

Assets |Go Down the Elevator'

"Many banks are hesitant about service firms since there are no assets to collateralize - those assets walk down the elevator every day," the research firm wrote. "But for stability of earnings and growth, many segments of service are attractive and have low bankruptcy rates."

Oxxford is not only touting service companies, but identifying those types of firms that make the best and worst prospects. The best are law firms, hospitals, colleges, computer services firms, and accounting firms. These businesses are most likely to produce strong revenues while seeking short-term debt for growth, the research firm said.

Among the worst prospects, according to Oxxford, are watch repair shops, barber shops, and motion picture service firms.

Oxxford warned, though, that servicing most companies in the service sector is heavily labor-intensive because borrowers need lots of hand-holding. Three of every four business have sales of less than $1 million and short-term borrowing needs of less than $50,000 a year, said Oxxford senior vice president Al Bloomquist.

"Consumer lending expertise needs to be applied here," Mr. Bloomquist said, noting that bankers are frequently not aggressive enough in touting their wares. Businesses traditionally conduct only 40% of their transactions with one bank, he said. "Go ask for more," he urges bankers.

One bank that goes along with preaching the service sector gospel is First Source Bank, an aggressive company in South Bend, Ind. First Source is fighting off bigger intruders, such as Society Bank and Ameritrust in Cleveland, Norwest Bank in Minneapolis, and NBD Bank in Detroit. All are actively pursuing the small-business market.

First Source, which has $1.25 billion in assets, has the biggest share of small-business accounts in its market. But the company recently altered its small-business strategy after learning from research that customers perceived it as "too big to care."

The Indiana company has split its calling officers into two groups. One provides standard business loans and services to companies with under $2 million in assets. The other, called the professional and executive banking group, caters to the personal and business needs of professionals from service industries.

Its target population includes accountants, lawyers, doctors, dentists, and teachers and administrators from central Indiana's large university population. Its products include an executive line of credit accessed by a checkbook and methods of service alien to many bankers.

It is not unusual for lenders to meet with a doctor at 6:30 a.m. in a hospital cafeteria, said Wellington D. "Duke" Jones, executive vice president in charge of the professional sector. "We are very loan driven and very responsive," he said. "We go to them."

Parallels with Private Banking

If this sounds more like low-key private banking than small-business lending, Mr. Jones would not disagree.

"The lines between private banking and small business are very blurred," he said.

He also cautioned that such segmented business does not make for quick rewards.

"It's not profitable unless you have the whole relationship," Mr. Jones said. "Competition on the lending side can make it difficult to get a strong return if you don't have the deposits."

Experts said that First Source is an aggressive local organization that knows how to play its marketing cards. "The bank has exceptional loan quality and is perceived well in the market as it plays up its active role in the community," said William W. McGinnis Jr., an analyst at the Chicago Corp.

First Source's most popular new product is a business equity line that is being touted to local professionals. It is structured like a home equity line of credit, but the collateral is usually a borrower's business or personal real estate. The bank normally lends up to 50% to 70% of the real estate equity, but rarely accepts accounts receivable or inventory as collateral.

Ms. Franzoni, a freelance banking reporter, is based in Springfield, Mo.

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