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Small World

Bigger isn't always better.

A recent study by two university professors found that small start-up banks are more likely to lend to small firms than are older banks of similar size.

According to Lawrence Goldberg of the University of Miami and Lawrence White of New York University in New York City, from 1987 to 1994, small-business loans accounted for 13 percent to 21 percent of the total assets of three-year-old banks and only 8 percent to 10 percent of the total assets of similarly sized older institutions.

Why do small businesses attract small banks? "[In a small bank,] you don't have the variety of people you may have at a larger bank, so you have to be much more entrepreneurial," says Rusty Cloutier, president of MidSouth National Bank in Lafayette, Louisiana. MidSouth has $220 million in assets; about 98 percent of its commercial loan portfolio is with small firms.

"I'm rooting for [small businesses]. It's important to the community and me that they be successful," says Gordon Gentry Jr., CEO of Harbor Bank in Newport News, Virginia. The bank has slightly more than $50 million in assets, and 60 percent to 70 percent of its commercial loans are made to small firms.

Familiarity with the company and the market it serves is another major reason small banks don't find lending to entrepreneurial firms risky, says Gentry. "We either know the people [seeking the loan] or the business, and we know exactly what opportunities are in the community."

But knowing the company representatives doesn't necessarily mean the small businesses are assured of getting their loans. These bankers still look for strong management teams and owners dedicated to spending whatever time it takes to make the business a success, even if that means working 70 to 80 hours a week, says Cloutier.

The bottom line is that these small banks and businesses both have a vested interest in making sure the community they serve and live in is viable.

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This article was originally published in the March 1998 print edition of Entrepreneur with the headline: Small World.

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