Breaking The Bank

Nonbank lenders are pulling ahead in small-business financing. Here's what playing the field looks like.

It's February 1992. You've raised more than $350,000 to get your manufacturing business off the ground, and the launch is such a success that by May, all your cash is tied up in receivables--and you need more money to keep growing. Where do you turn for help?

That's the question 33-year-old Ken Seiff asked himself when his company, Pivot Rules Inc., faced the scenario described above. "I needed to open letters of credit for future [clothing] lines, but I couldn't afford them," recalls the New York City sportswear manufacturer, who needed to pay his Hong Kong-based suppliers.

Seiff's accountant suggested he contact Heller Financial Inc. This Chicago-based international commercial finance company offers equipment financing and leasing, factoring, working capital loans, collateral-based and cash-flow financing, small-business lending, and specialized equity investments. The factoring division specializes in the garment and textiles industries--a good match for Seiff.

"Banks aren't terribly interested in the apparel industry, and from what I know of them, they're also not very interested in start-ups," says Seiff, explaining why he chose Heller. "We also had a relatively limited collateral base, which would have made it even less enticing for a bank."

Heller, on the other hand, was an aggressive lender willing to purchase and collect Pivot Rules' accounts receivable. What attracted Seiff to Heller--even more than the fact that it met his immediate needs--was the potential he saw to establish a long-term relationship.

Seiff's decision to go with a nonbank lender for financing is one being made by a growing number of small-business owners. In fact, according to the SBA, two of the top three lenders for the SBA's 7(a) program for fiscal year 1996 (based on number of loans approved) were nonbank lending institutions. The Money Store Inc. was the top lender, AT&T Small Business Lending Corp. was third. Seiff's lender, Heller Financial Inc., came in 11th.

There's no doubt commercial finance companies are steadily encroaching on the small-business lending territory previously dominated by banks. Finance Companies and Small Business Borrowers, a study conducted for the SBA Office of Advocacy by Dr. George W. Haynes of Montana State University in Bozeman, found that from 1980 to 1992, nonbank financing companies increased their business lending from slightly less than $86 billion to almost $300 billion. Finance companies are also the second-largest supplier of business credit (13 percent) behind banks (54 percent).

"In general, finance companies want to see strong assets to back up a loan and will monitor those assets much more carefully. For that reason, they can loan more against the assets. So chances are a smaller business might get a larger loan from a finance company [than from a bank]," says Bill Sihler, a finance professor at the Darden Graduate School of Business Administration at the University of Virginia in Charlottesville. However, says Sihler, this money will cost more. Consequently, a business must decide which is more important: the amount of money or how much it will cost to borrow it.

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This article was originally published in the March 1998 print edition of Entrepreneur with the headline: Breaking The Bank.

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