Is your bank’s Small Business effort a casualty of the current downturn? At many banks it is. Never having understood or appreciated the value of the small business segment in the first place, some senior managers see the downturn as sufficient reason to pull back from this area in light of higher delinquencies, lower balances, and uncertain future performance.

At the same time, business customer loyalty is at an all time low. Jim Collin’s new book, How the Mighty Fall, recounts the story of Amadeo Giannini, founder of the Bank of America, who responded to the 1906 San Francisco earthquake by setting up an outdoor table amidst the rubble in order to make loans for rebuilding the small businesses of his city. Today, small business customers would expect their bankers to dive under a table to avoid a loan request rather than help them. For many customers, trust in their bankers is gone.

Much of the effort that banks have made over the past decade to position themselves as “small business friendly” has been destroyed. Today, larger banks are widely viewed as uncaring at best and company-destroying at worst. Further, while interested in this segment and favorably viewed by it, a growing number of Community Banks are in economic trouble and may not have sufficient economic strength to continue to support this segment.

What’s Sunk the Small Business Effort
Five factors have eroded the small business effort at many banks:

*  Higher delinquencies and losses
*  Lower risk-adjusted returns
*  Customer’s need for loans
*  Concerns with SBA lending
*  Weak political position of the Small Business group in larger banks
*  Commercial real estate concentration at community banks

*  Higher delinquencies and losses. Bank of America and Advanta may serve as the poster children for bad small business lending. In April BofA announced a 13.5%small business loan loss ratio. Even worse, Advanta, solely focused on providing credit cards to small business, is in liquidation. Among Community Banks, last week’s Wall Street Journal featured a page one article on New Frontier Bank of Greeley, Colorado; the headline says it all: “Town’s Friendly Bank Left Nasty Mess,” reflecting the negative impact on small businesses of the bank’s decline.
 
*  Customer’s need for loans. You all know the old tale about banks only wanting to lend to those who don’t need money; recently, there has been some truth to this. The Wall Street Journal often has articles that roast bankers for undercutting small businesses and refusing to step up to the needs of their customers. Similarly, a few weeks ago the New York Times published a somewhat naïve article on getting a business loan, declaring in its subhead, “Small Banks Will Lend if They Understand the Business.” Unfortunately, that is not always the case. Within many banks, the potential downside to the banker of making a loan takes precedence over customer needs.
 
*  Lower deposits and risk-adjusted returns. A focus on risk-adjusted returns has become the mantra at many banks. Low-cost deposits that drive much of small business profitability are lower due to the economic cycle and loan losses are up; hence, risk-adjusted returns are down, although we believe returns for this business continue to exceed most others.

*  Concerns with SBA lending. While the Obama administration is working hard to improve major processes related to SBA lending, industry skepticism about the program seems to have increased. At a recent industry meeting, I heard multiple tales of delays in receiving payments for bad loans. Banks embracing this program operate with a much stronger foundation for success with small businesses. This past Saturday’s Wall Street Journal featured an article on the SBA with the subtitle: “Some Big Banks See the Reward as Too Small for the Paperwork.” Unfortunately, banks are making a mistake in viewing programs like “America’s Recovery Capital” (ARC) as standalone transactions rather than part of relationship building with both individual business customers and the small business community overall.
 
*  Weak political position of the Small Business group. At many of the top 50 banks, small business remains the classic “red-headed step child,” not fully appreciated or embraced by its retail or commercial siblings. Community Banks and banks in which small business is a separate line of business “equal” to retail and commercial banking operate with a competitive advantage.
 
*  Commercial real estate issues at community banks. It is quickly becoming clearer that many community banks destroyed themselves by an over-reliance on commercial real estate lending. CRE is the other shoe that is dropping on the banking industry right now. For some, the CRE disaster has the knock-on effect of reducing capital available for small business, whether for C&I needs or owner-occupied transactions.

The Winners
Of course, not all banks have deserted the small business space. Several big players, such as PNC, Wells Fargo, and U.S. Bancorp appear to continue to demonstrate their commitment while many of the other top 50 banks pull back. Other winners are the Community Banks (that is those that avoided blowing themselves up with commercial real estate lending and, therefore, can focus on taking share from others) and Credit Unions. Whatever the reality, Credit Unions are widely viewed as “warm and fuzzy” versus rapacious commercial bankers.

While we can argue about competitive winners, the small business customer is almost certainly a loser. In many cases, he/she will have fewer choices going forward, pay higher interest/fees, and face increased skepticism from banks. However, ultimately, the biggest loser is the banking industry itself.