From the March 1997 issue of Entrepreneur

When Roy Williams Sr. needed a loan to start New Orleans Depot Services in September 1996, he turned to New Orleans-based Whitney National Bank. After all, Whitney had served him well during the 20 years he'd banked there as owner of AAA Tire Finishing, a tire finishing equipment and supply company. When he decided to start a second business with his son Kirk, Williams knew his loan officer at Whitney would work with them to make it happen. And he was right. Just a few days after applying, the partners got an equipment loan and a line of credit for their shipping-container service and repair company.

Good relationships have always been important in banking, but these days, the relationship between banks and small business is rapidly expanding as more banks offer cash management programs, streamlined loans and convenience services to their small-business clientele. At Whitney National Bank, for example, Williams and other small-business customers can do more than obtain loans and lines of credit; they can also take advantage of a host of services under the bank's new Business Edge Banking program, which was launched in May 1996.

According to Whitney's vice president Rebecca Dey, Business Edge Banking was the direct result of input from small-business customers. Whitney defines a small business as one with fewer than 20 employees and no more than $5 million in annual sales, says Dey.

"We found there was a real need for a business checking account that is as easy [to use] as a personal checking account," Dey says. As part of Business Edge Banking, Whitney created a no-fee checking account for companies that write fewer than 150 checks a month and maintain either a $2,500 minimum balance or a $5,000 average collected balance each month. A consolidated monthly statement puts all account and loan activity in one report, simplifying cash management; customers can even receive a daily fax of the previous day's banking activity.

Whitney's Business Owner's ATM card provides 24-hour account access. "I know what small businesses' hours are," Dey says. "They're doing banking at 9 p.m. and on weekends."

Whitney National Bank is just one of a growing number of banks targeting small companies with tailored financial management programs. Although there aren't any statistics on exactly how many banks offer such programs, industry observers say the small-business market is garnering attention as other bank revenue streams subside.

Ann Grochala, director of bank operations at the Independent Bankers Association of America (IBAA), a trade group to which nearly 5,500 community banks belong, says that banks are seeing increased competition from nonbank financial institutions. Sources such as Merrill Lynch, American Express, Money Store and even insurance companies are helping small businesses finance equipment and inventory. She adds that one way for banks to compete is to offer other products, such as cash management and electronic banking.

Small But Growing

Terri Dial, vice chairman and head of the Business Banking Group at Wells Fargo Bank, says her bank sees small business as a crucial growth market. Growth engines that spurred bank growth in the 1980s are less reliable now--big corporations often skip bank financing in favor of the capital markets, and large-scale real estate development has slowed considerably. "As a market segment, [small business] is growing," Dial says.

To capitalize on this growth, Wells Fargo created a line of products and services for small businesses in the late 1980s. Among the first products introduced were a flat-fee small-business checking account and ATM banking for small companies.

Once available only to individuals, ATM cards with various access levels are now issued by Wells Fargo to small-business owners and their employees. In addition, Wells Fargo's National Business Banking Center provides small-business clients with account information and assistance via telephone 24 hours a day.

The frequent interaction with and feedback from small-business customers also led Wells Fargo to make some improvements in its small-business lending program. "When we talked to small-business owners, they said they weren't being served very well," Dial says. "So we made some dramatic changes in lending. We found out one reason small businesses complained about access to credit was that they just needed small loans."

Traditionally, paperwork and processing time have made lending amounts in the $25,000 range too costly for banks. By streamlining the application process and reducing paperwork--not to mention making a profit from the additional fees for new banking products for small businesses--Wells Fargo has been able to make more small loans. Dial says the majority of the bank's small-business loans are now for less than $50,000. The upshot? In 1989, Wells Fargo's small-business loan portfolio was about $300 million, according to Dial. Today, it tops $5 billion.

Working Harder

Part of the trend toward banks offering more programs may have to do with the economic cycle. "Several years ago, there was a credit crunch," says Grochala. "For the last couple of years, however, small businesses have been thriving." As a result, they present a more attractive market for banks to target.

Many of the banking programs targeting small businesses are still very new, so it's difficult to say whether they are here to stay or how far they'll really go in improving the overall financial climate for small businesses. According to the 1996 Survey of Small and Mid-Sized Businesses conducted by Arthur Andersen's Enterprise Group and trade group National Small Business United (NSBU), 77 percent of the approximately 480 businesses that reported applying for a bank loan in 1996 succeeded in obtaining that loan. That's down from the 85 percent of respondents who succeeded in getting a bank loan in 1995.

Beyond traditional loans, however, banks are coming up with other ways to help finance businesses. According to the Andersen/NSBU survey, 3 percent of the nearly 1,000 companies polled said they had pledged or sold their accounts receivable--factoring, as the tactic is generally known--to help finance their businesses. Factoring isn't a new concept, but the fact that banks are beginning to offer it as part of their small-business banking programs is somewhat unique.

For David Stern, factoring is a necessary source of capital for David Stern Jewelers Inc., the Boca Raton, Florida, company he founded in 1983. When Stern ships his gold and jeweled creations to retailers nationwide, he can often expect to wait a good 90 days for payment. Selling his accounts receivable and getting the money the day he ships orders enables him to buy materials to fill additional orders.

Though Stern says he had several options when looking for a financial institution, he chose the local First Southern Bank, which buys receivables from Stern that are less than 59 days old. Factoring helps Stern service new accounts by allowing him to offer customers credit terms. "My business is growing right now," he says. "It would be impossible to grow without [the factoring program]."

According to Robert H. Santom, CEO of First Southern, the bank charges an average of 3 percent for the service and keeps another 10 percent in reserve as protection against uncollectable bills. Many companies are able to make up the 3 percent, Santom says, by taking advantage of discounts for paying insurance premiums on a yearly basis, for example, or increasing business by offering customers favorable payment terms.

Technical Assistance

Advances in computer and interactive technology are rapidly putting the kind of information and services once available only to large corporations within reach of small businesses. National City Bank of Columbus in Ohio, designed its Desktop Banking program with small-business owners in mind, says Anne Jennings, vice president of the Business Services division.

Using Desktop Banking, business owners can access all their National City accounts via computer to check balances, transfer funds and even make quarterly tax payments. The software package costs $150 to set up, then $50 per month for the first account and $7.50 per month for subsequent accounts. Jennings says most businesses' cash reserves cover finance charges, so most don't pay for the service.

James Shaffer, vice president of administration at Paul J. Ford and Co. in Columbus, Ohio, uses Desktop Banking to handle payroll and cash management at the 30-employee structural design and engineering firm. "It's a way to do banking whenever you want," Shaffer says. He cites simplifying payroll as the primary advantage of the system, which allows the company to offer automatic paycheck deposits to its employees.

Wells Fargo's Business Gateway, an online service for small businesses, has a special feature that warns business owners when their cash accounts fall below a certain pre-programmed level. The idea came from a focus group, says Dial, who adds, "Our best ideas have always come from our customers." Introduced on a limited basis last summer, the $5 monthly service will be rolled out to Wells' customers this year, but Dial says word-of-mouth has already resulted in a subscriber base "in the thousands."

First Southern Bank will launch its own online banking program next month. Santom says the program will focus initially on business accounts, allowing customers to stop checks, transfer funds and the like. "A couple of years ago, it would have cost us $1 million to do this," he says. "Now we can do it for $25,000."

After all, banks are businesses, too. If they can make catering to small companies profitable, they will do it. The trend toward designing bank products and services for small business is not yet comprehensive in scope, but experts say it could pick up if the economy and small businesses stay strong. The banks--and the small-business products and services--profiled here represent just some of the many programs banks are offering nationwide. With so many choices available, be sure you shop around or request even more from your current bank.

Contact Sources

First Southern Bank, 9955 Glades Rd., Boca Raton, FL 33434, (561) 479-2100;

Independent Bankers Association of America, 1 Thomas Cir. N.W., #950, Washington, DC 20005-5802, (800) 422-8439;

National City Bank of Columbus, 155 E. Broad St., Columbus, OH 43251, (614) 463-7624;

New Orleans Depot Services, 5690 Chef Menteur Hwy., New Orleans, LA 70126, (504) 242-6009;

Paul J. Ford and Co., 250 E. Broad St., #500, Columbus, OH 43215, (614) 221-6679;

Whitney National Bank, 228 St. Charles Ave., #307, New Orleans, LA 70103, (800) 347-7272, (504) 586-3620.

Stephanie Barlow is a former senior writer for Entrepreneur.