What's the price of loyalty?
Banking consultant Charles Wendel says that when it comes to a small business' relationship with its bank, it's 25 to 50 basis points. If the business owner appreciates the service he's getting from his bank, he might be willing to pay a rate of 7.5 percent on loan or line of credit, even if the bank across the street is offering a rate of 7 percent.
But what if the difference is greater, say 75 to 100 basis points? At that point, the borrower is likely to choose rate over long-term relationship, says Wendel, the president of Financial Institutions Consulting in New York. And if a bank is promoting a rate that's as much as 200 basis points below the competition? Well, says Wendel, "that's a market-shifter."
Better watch out, then, for JPMorgan Chase. Already an active lender to small businesses, the nation's second-largest bank intends to boost its market share-and perhaps make a small dent in the nation's unemployment rate-with a line of credit that could potentially lower a borrower's rate by two full percentage points over the life of the loan.
The product, called Loan for Hire, works like this: A business approved for a line of credit up to $250,000 can knock 50 basis points off its rate with each new employee it hires in 2010, up to three. The borrower can shave an additional 50 basis points off the rate with a business checking account. It all adds up to a 200basis point reduction that Chase says could save a borrower with a $65,000 outstanding balance $4,000 in interest over three years.
Of course, many small businesses are hunkering down and have no interest in taking on more debt until they are confident that the economy is truly on the upswing. Others aren't about to add tens or hundreds of thousands of dollars in salaries just to save a few thousand bucks.
But, says Wendel, "businesses that are ready to borrow and ready to hire certainly are going to pay attention to this."
Tying a borrower's rate to the number of new employees it hires is unusual, but these are unusual times. It's been said repeatedly over the last 18 months that companies aren't creating jobs because banks won't lend them the money they need to expand, and while that's an oversimplification, it's the perception banks are fighting.
That's likely why, when Chase rolled out Loan for Hire in June, CEO Jamie Dimon focused not on market share, but on jobs. "We encourage businesses to take advantage of the lowest interest rates in years and to create more jobs for the economy," Dimon said.
Loan for Hire, which runs through yearend, is part of a broader commitment by Chase to up its small-business lending by 40 percent this year over last, to $10 billion. Its total loans to small businesses, including credit cards, increased 37 percent, to $4.5 billion, in the first half of 2010, compared with the same period a year earlier, and the bank has hired roughly 300 small-business bankers this year.
Wendel says these initiatives put pressure not just on other large banks, but also small ones that are typically seen as being more friendly to small business.
"A lot of community banks aren't lending right now, or they've increased their pricing," Wendel says. "Some small businesses are suspicious of big banks, but on the other hand, some feel let down by community banks. "