California equity home loan officer

IF YOU WENT LOOKING FOR A BANK LOAN a year ago and were given the courteous-but-cold shoulder, try giving it another go this fall. You might get a very different reception.

Just a quick glance at the numbers shows lending to small businesses is way up compared with a year ago. Larger companies, still hunkered down, are skittish, preferring to finance expansions with internal cash flows rather than take on more debt. So banks are again turning their attention to small businesses, offering them friendlier smiles, new products and more money for the asking.

San Francisco-based Wells Fargo, already one of the largest small-business lenders, reported 17 percent growth in lending to that market this year. The PNC Financial Services Group of Pittsburgh saw lending to small businesses shoot up by 91 percent in loan dollar volume and 77 percent in the number of loans made during the first half of 2004, compared with the same period one year ago. "It's been absolutely tremendous," says Karen Larrimer, chief marketing officer for PNC Business Banking, who notes that, in comparison, PNC's commercial segment has grown loan dollars by only 20 percent over last year, as of the end of August 2004.

SBA lending is up as well. The SBA reported in August that with two months left in fiscal year 2004, it had already backed more loans in the 7(a) and 504 programs than in any other year in its history. Bank of America, for one, did more than 9,000 SBA loans in 2003--compared with 950 in 2001, according to Carol Nichols, central region executive for small-business banking at the Charlotte, North Carolina-based bank.

While all agree the trend is north, opinions diverge over the cause for the climb. One obvious answer is that as banks feel better financially, they're more comfortable parting with money. "The banking industry weathered the recession very well," says Keith Leggett, senior economist with the American Bankers Association, who adds that banks are well-capitalized at the moment. "And over the [past] several quarters, we've seen improvements in credit quality--that's naturally going to translate into making credit more available."

Nichols points to the relative good health of those seeking loans. "Businesses are knocking with better financial statements than a year ago," she says, adding that they're showing increased sales, more customers and greater liquidity on their balance sheets.

Business owners are also more optimistic these days, thanks to an economy inching forward, says Rebecca Macieira-Kaufmann, an executive vice president and small-business segment manager with Wells Fargo. To understand how small-business customers feel about the future, Wells Fargo partnered with The Gallup Organization to take a quarterly pulse of the market's optimism, beginning last year. The score rose from 69 then to 103 this past June. "That is very much linked to the growth in lending," she says.

Larrimer attributes her bank's soaring increase to its smarter methods of attracting small-business customers. PNC has spent more on advertising and has developed new products that appeal to the small-business segment. After researching and determining that small-business owners prefer home equity loans to business loans, for example, the bank created a business-based loan for which entrepreneurs can use their homes as equity.

The question is, Will the surge hold up for 2005? "The key factor is going to be the economy," says Leggett. "That's going to influence the willingness to lend or not to lend." Another hiccup could lead to a slowdown and a tightening of underwriting standards. If it does, few argue over who will first feel the pinch.

"If oil goes to $50 a barrel or there's a global slowdown, banks will start to tighten down on their small-business customers first," says Glenn Yago, director of capital studies at the Milken Institute, a Santa Monica, California-based think tank dedicated to creating jobs and finding capital for entrepreneurs, both locally and globally.

Ironically, smaller customers may also suffer if the economy takes off. If big-company optimism rises, for example, and they take on more credit en masse, banks may become fickle, turning their attention back to the more lucrative large loans. "On the other hand," says Yago, "banks are learning firms, and I think they've come to learn that small business is a profitable and important market."

C.J. PRINCE is executive editor of CEO Magazine. She can be reached at cjprince@chiefexecutive.net