WEEKLY ADVISER: Keeping Small-Business Loans Takes Both Thought and

The vice chairman of California's Union Bank shook up his audience at a recent conference by issuing this warning: "Don't think you have a lock on local small-business lending in your communities."

"You may scoff when an unsolicited letter comes to your customers offering $50,000 on a preapproved basis," added the executive, Richard C. Hartnack. "But then, your small-business borrowers start thinking, 'Am I not better off taking this automatic loan than having to go to my bank, present all my documents, and then wait for them to respond and possibly turn me down?'"

In sum, Mr. Hartnack concluded, banks face tough new competitors who are aggressive and innovative, and they have to do something about it.

Only two hours earlier, Georgetown professor William Droms' update of the sponsoring Consumer Bankers Association's small-business banking study revealed that member banks now consider Merrill Lynch as their second most powerful small-business competitor, after rival banks. And as I heard Mr. Hartnack's comment at a panel discussion on the strategic role of small- business lending, I understood why.

Small-business credits have taken so important a role on the asset side of the ledger that many large loans are being made directly by Wall Street firms and other nonbanks. Certainly, banks must find a way to reverse this trend.

Is the remedy sending out unsolicited approvals of credit, as some other lenders do? Clearly, this technology is powerful; many bankers at the conference reported that no human looks at a loan less than $250,000.

Logically, the same process that goes into credit scoring programs can be used to find companies that score well and offer them a loan.

Many banks have had success with preapproved credit card offers, and perhaps the same techniques can work in generating small-business credits.

But most of the conferees I questioned said they felt unsolicited small- business credits, unless a borrower's home equity is part of the underwriting, are just too dangerous for banks.

But what did come out of the panels and discussions was the idea that banks can do more for their small business borrowers, and this additional service may be worth more to a marginal customer.

These service suggestions revolved around using the information gathered in evaluating small-business loan applications to benefit the customer as well as the bank.

Take forms that customers must fill out with loan requests, for instance. Can't a bank take that information and combine it with its expertise to give the company a better picture of where it stands and what its future dangers are?

Just as you learn a great deal about yourself from the information you provide a financial planner, a small business can benefit from what the forms it fills out tell the trained reader.

And why not carry this a step further?

A bank does a thorough job on the company's financials before making a big loan. Why can't the bank sit down with the company and show what it learned about the operation from its analysis - where the dangers and the opportunities exist.

In sum, since the bank has done all the work to understand where a company is going in the first place, why can't it be a consultant and share this insight thoroughly with the applicant - whether the loan is approved or not?

This is the type of help that differentiates a single loan request from a relationship. And if used properly, it is an advantage of the bank that can't be matched by an unsolicited offer of preapproved credit.

Mr. Nadler is a contributing editor of the American Banker and professor of finance at Rutgers University Graduate School of Management.

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