Community banking & small business

It's a formula that accounts for a significant sector of the community banking industry.This could be a particularly opportune time for community banks to consider hearing out those who yearn to make a living selling pizza, repairing cars, running a construction company, or otherwise running a small business. In a report on small business lending activity, the U.S. Small Business Administration noted that "despite major consolidation in the banking industry, the market for small business loans tends to be local in nature.".To be sure, large banks dominate small business lending but smaller banks account for a disproportionate amount of the small business credit out there. In a March speech to an industry group in Hawaii, FDIC Chair Martin Gruenberg noted that "with just 14 percent of industry assets, community banks account for nearly half of all the small business lending done by all banks in the United States.".Waukesha State Bank outside of Milwaukee is an avid small business lender. Tony Laszewski, a senior vice president at the Waukesha, Wis., institution, noted the mission of the bank is to serve its community. If a budding young entrepreneur comes in with a request for a business loan, Laszewski indicated he or she will get a fair hearing. "You cannot turn your back on a guy asking for 10 grand," he said..Waukesha has a strong manufacturing base and grew up independent of Milwaukee so it has its own health care and higher education system. Laszewski came to the bank late last year from a commercial loan job in Minneapolis, with the idea of boosting commercial and industrial lending.."We need to do a better job reaching out to the middle market manufacturers," he said. Local ownership and control of the bank helps, as he said the bank's owners have a long history in the area and know the land and its people.."That's our ace in the hole," Laszewski said, "knowing the character of the people you're dealing with.".Waukesha State Bank notes on its website that it has several advantages over competitors when it comes to business loans. It is financially strong. It can make decisions quickly — right in the county instead of half a country away. It has expertise in the field, focuses on its community, and touts "local everything.".Waukesha may not have the absolute lowest rate on a business loan, Laszewski conceded, but said these attributes should help it become a preferred lender..Another boost for a small business loan program — at any bank, large or small — is participation in the U.S. Small Business Administration's various lending programs. They typically come with clearly defined credit terms and a default guarantee..Laszewski said his bank uses SBA loans "to shore up deals a little short of capital." He and other bankers noted they do not look to SBA to make loans they might not otherwise make..Making the most of SBA."We don't put bad loans into the SBA just to do a loan," said Tom Boaz. He is a vice president at Busey Bank, in Champaign, Ill., and is its liaison officer with the SBA..Rather, Boaz said he believes an SBA loan merely makes a good loan better. Boaz said about 5 percent of Busey Bank's commercial portfolio is comprised of SBA loans. When it expanded into Indiana and opened a loan production office in Indianapolis, Busey Bank originally did so only to make SBA loans (it now makes other kinds of loans there)..Boaz said there are some special regulations tied to SBA loans, but they are no hindrance to doing business. And as fellow Illinois banker Jo David Cummins noted, "everything they ask you to do, you should be doing anyway.".Cummins is president and CEO of Community First Bank of the Heartland, in Mt. Vernon, Ill. A majority of his bank's loan portfolio is in business loans, and he said SBA loans help his bank score higher on every ranking point of the CAMELS system..On the management portion, for example, he said, "if you're trying to manage your risk, why not use everything at your disposal [with a guarantee]?".SBA loans can also come in handy when it comes to setting terms and conditions with borrowers. Say a manufacturer wants to buy a piece of equipment that the bank's loan policy says merits a five-year loan. However, the equipment has a lifespan of 10 years, or maybe 15 years. In this instance, Cummins said his bank could consider an SBA product that would have a longer term that would lower the monthly payment needed from the equipment owner..SBA loan or not, business lending is not necessarily a slam dunk. Among the more notable challenges are a higher risk profile, thinner profit margin and possible slack demand..Small biz lending challenges."Commercial lending just inherently has more risk," said Cummins. A homebuyer may lose his job and default on a loan, but at least the collateral is still standing and has value. There is a huge failure rate for start-up businesses, and in economic downturns like that of 2008-10 (with vestiges remaining today) even seasoned companies were not spared.. Business loan officers need to draw upon many skills in order to correctly judge whether to recommend a loan. Putting a value on collateral on a three-bedroom home can be fairly easy once you track down comparable valuations of similarly sized homes. But what if you're a new dentist or CPA in town who wants to buy the practice of a retiring professional whose customers may or may not stay on?.In such instances, Laszewski said, "sizing up your borrower is super important.".The SBA is on board with this. David Hall, an SBA spokesman in Washington, D.C., said that for loans under $350,000, a lender may use its own criteria for "assessing the character, reputation and credit history of the application.".And loan officers need to be able to assess the "character" of the business, as well. Laszewski said that one of his loan officers may work on an application from a foundry on one day, and on the next day from a manufacturer of parts for a nuclear reactor. The capital needs, management structures and revenue stream of these two firms are worlds apart, yet they are both knocking on the same door asking for money that may be intended to reach completely different goals..In these instances, experience counts. Many of the 10 loan officers working commercial and industrial at Waukesha State Bank have 20 years' tenure, while Paula Neis, who heads up the SBA operations, has closer to a quarter century of experience..Then there are interest rates. Even if a loan goes to a great company with a solid track record, it may not be much of a money maker as margins currently are razor thin. That's especially so for better credit risks..Everybody's chasing a good loan, said Community First Bank's Cummins. But he prefers that to the alternative of not making a loan at all.."You're still better to have a thinner-priced loan than to have it sitting at the Fed drawing three basis points," he said..Tepid loan demand.And then there is a question of appetite for loans. Yes, the economy has picked up considerably since 2009. And yes, there is more buying and selling activity for small businesses. But not everyone is seeing a surge in demand for small business loans..In its latest quarterly survey of top concerns among small businesses, the National Federation of Independent Business saw taxes as the No.1 concern. No. 2 was government regulation (sound familiar, bankers?) while finances and interest rates ranked dead last..Jack Mozloom, a spokesman for NFIB, said that from what he can see, his members have other worries at present that take precedence over borrowing money from a bank. They're just now wrestling with the potential impact of the Affordable Care Act, and efforts by the federal government and many states to raise minimum wages..Given those question marks, Mozloom said his members may be thinking "maybe now is not the time to take on a big loan.".It's not as if there aren't business opportunities. Tim Bullard is president of VR Lakes Business Group, a business broker based in Waukesha. He said "we have more business than we know what to do with" and encouraged banks to join in..So far this year, Bullard said he has closed about 40 transactions but only eight have involved a bank loan. The remainder have been cash transactions, or cash from the buyer plus financing from the seller..Bullard has 15-plus years of experience brokering business sales, and said he has never once seen a bank-financed deal close on time.."Issues seem to arise with each deal," said Andy Kocema, a broker with Calhoun Companies in Minneapolis..Since time is money, expediting the process could help take away some of the sting of those razor thin margins. Especially if you're handling a $10,000 loan in Waukesha.