Business Lenders Strikes a Chord with SBA Borrowers
By Crystal Detomore Rodman, Guaranteed Lender, June 1, 1999
Reprinted with permission from the June 1, 1999 issue of Guaranteed Lender
© 1999 SNL Securities, LC
The management of Business Lenders LLC learned a long time ago that many entrepreneurs seeking startup or expansion capital are only interested in a loan - not in a long-term relationship with the financial services provider.
The non-bank lender has used that customer mindset to its competitive advantage in the small-business loan market.
"It really does make a difference," said Penn Ritter, co-founder and executive vice president of the Hartford, CT-based finance company. "We're not trying to sell our borrower our checking account rate, or [asking] them to put money in a savings account or a cash management account, or [requiring] that all of their paychecks come from our institution. We're not trying to sell them services. We are trying to show them that we can close a loan for them."
Ritter, a former clerk for the Connecticut House of Representatives, and Gary Mullin, a former Fleet Financial Group executive, founded Business Lenders in 1994 to provide SBA financing to small firms and start-ups in the Northeast. Seeking a lower cost of funds and increased operating capital, management sold the company to Medallion Financial Group, a specialty finance company best known for its taxicab medallion lending business, in July 1997. Medallion's niche-based strategy focuses largely on smaller business credits unpopular among banks, along with loans to women and minorities, a population of small-business owners traditionally overlooked by banks.
One of several Medallion subsidiaries specializing in small-business financing, Business Lenders has access to conventional loan products, as well as its core SBA loan offerings. Like its parent company, Business Lenders places a strong emphasis on originating loans to the underserved. Indeed, Ritter was the only speaker at a March public hearing to express support for the SBA's plans to open the 7(a) program to an additional 10 or so non-bank lenders. The agency's New Markets Lending Company Program is part of a larger initiative to increase loans to small businesses in distressed communities and to underserved segments of the population.
The banking community has argued that the lender program would unfairly exclude banks, while the SBA lending industry at large maintains that the SBA would be better served by offering incentives to existing 7(a) lenders to originate loans to the underserved.
Many in the SBA industry have pointed to research by BusinessDataSource that shows that 74% of SBA loans originated between 1994 and 1997 reached the so-called "new markets."
But Ritter argues that lenders could do more.
"The new-markets lending initiative is fabulous," he said. "There are some others who think there is not a national need. But how can somebody live in America and say there is no need to lend more money in urban areas?"
Medallion, whose motto is "In niches, there are riches," will seek one of the new-markets licenses, Ritter said.
In addition to its shared mission to reach underserved markets, Medallion has provided Business Lenders with increased capital resources to not only expand into new geographic regions but to significantly increase SBA loan originations. The non-bank lender originated $42 million in SBA loans in fiscal 1998, ranking it among the top 30 originators. In fiscal 1997, it had $34 million in loan volume. In the first quarter of this year lone, loan originations have increased 67% over the year-earlier period.
Business Lenders, which has originated loans in 26 states, operates loan-production offices in Arizona, Illinois, Massachusetts, New York, New Jersey and Rhode Island. Ritter said further expansion is planned for the West and Midwest, where the company will use its "hubs" in Arizona and Illinois as platforms for growth.
He credits the company's success, in large part, to a strong emphasis on hiring staff with vast knowledge of the SBA loan program, and a highly personalized approach to originating the guaranteed loans. For starters, Business Lenders does not credit-score, a mainstay for many small-business lenders originating loans of $250,000 or less. Ritter said the computerized underwriting tool is not conducive to Business Lenders' style of lending.
"There's room for fast-moving entrepreneurial non-credit-scoring lenders," Ritter said. "We have to look at the individual nature of every deal. We don't want to credit-score. By the nature of the way we set up a credit, we have to look at an individual loan.
"The reason someone was spit out of credit-scoring [recently] was that they had a fire two years ago, which resulted in them not being able to pay their bills. Now, they've paid all of their bills. The insurance settlement has come in. They're a terrific manufacturer, and they're back up on their feet. It's going to be a terrific loan, but credit scoring denied them credit."
Ritter noted that 42% of the company's loans go to women, some of whom are good candidates for small-business financing but likely would be disqualified by credit-scoring.
The SBA, however, has warmed to the concept of credit scoring.
When the SBA increased the maximum loan amount of its LowDoc loan program last September, the agency for the first time required lenders to use credit-scoring to determine a borrower's creditworthiness. However, the federal agency is reluctant to abandon traditional credit analysis, as loans with unacceptable scores are processed under traditional loan criteria.
At Business Lenders, local team lenders are responsible for underwriting the loans, but a central loan committee has the final say in whether an entrepreneur qualifies for financing.
"We do that very quickly, " Ritter said. "We don't want to send a credit 3,000 miles to sit. So the credit committee meets as often as necessary."
Business Lenders, like other non-bank originators, seeks to finance larger real estate loans through the SBA.
"We're in that traditional SBA mode [in which] we like real estate loans," he said. "The great SBA loan - and it always will be - is a blended rate for a real estate loan, with working capital and equipment. That is certainly our bread and butter. But unlike other non-bank lenders, we will certainly entertain non-real estate loans."
While competitors vary from market to market, Business Lenders counts fellow non-bank lenders as its principal rivals in most SBA loan markets. But in the past several months, the market has undergone an evolution of sorts in response to increased merger-and-acquisition activity among non-bank lenders. Not surprisingly, it has shifted some borrowers in Business Lenders' direction, primarily those just seeking a small-business loan and none of the extras. A primary example is First Union Corp.'s acquisition of The Money Store Inc., the nation's leading SBA loan originator.
"The more bank and nonbanks merge, the better our business becomes," Ritter said. "As a corollary to that, we're now finding that we're a very comfortable place for some top non-bank commercial lenders."
At the same time, though, it's widely believed that The Money Store, with the product mix of First Union behind it, has turned up the heat in an industry known for lenders offering small-business owners little beyond SBA financing. The market appeared to be moving further in that direction when management at San Diego-based Bank of Commerce entered into a merger agreement with U.S. Bancorp. Bank of Commerce officials said that the union would allow the SBA originator to expand its offerings to small businesses.
The strategy contrasts sharply with that of Business Lenders.
Ritter maintains that loan development officers who don't have to concern themselves with cross-selling small-business products can better concentrate on the technical aspects of originating an SBA loan, as well as offer the borrower more personalized service.
"Many times entrepreneurs talk to a bank and are very frustrated because that bank officer is not very business-oriented," added Judy Hart, senior vice president of marketing for Business Lenders. "They find in us a compassionate person who is able to listen and think like a business because we are very entrepreneurial in our own organization. We don't think like typical bankers."
Such specialized service can't hurt, given the reality that dedicated SBA lenders have found themselves vying for loans in the most competitive landscape in recent years. While the SBA is on target to exceed 1997's record of $9.5 billion in 7(a) loan approvals, volume is declining in some markets. One reason is the shift toward conventional underwriting. Many banks originate small-business loans that would have required an SBA guarantee in another economic climate. Additionally, many banks, in an effort to become full-service providers of financial services to businesses, are starting SBA lending divisions as a means of rounding out their product lines.
Business Lenders has had plenty of room to grow despite the increasingly competitive environment.
"We haven't had any problems at all," Ritter said. "It is true that there is more competition out there. But while there is more competition, there is also increasing awareness of the power of SBA lending. With an aggressive effort, with quality lenders, you can always originate more SBA loans."
