Small Business Lending Is Sometimes Thankless

June 19, 2002
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GRAND RAPIDS — You don’t often hear from people who’ve been successful getting a bank to capitalize their businesses.

But Paul Kramer, executive vice-president of United Bank of Michigan, says one hears a great deal from people frustrated by bankers’ unwillingness to underwrite entrepreneurial fantasies.

The problem, Kramer said, is that while some borrowers are mature, realistic people, others come into the office wearing rose-colored glasses.

On the one hand, he said, some would-be entrepreneurs have some form of collateral, a good credit record and a stable employment background — and are committed to continuing their day jobs.

But others are under the impression that their “idea” is an entrepreneurial rocket needing a mere infusion of cash.

“With any start-up, we’ve got to be careful,” Kramer said. “And this is particularly true where some intangible service is offered — say, someone’s going to start an advertising agency or public relations company. There’s no collateral.

“You can’t use the guy’s computer as collateral,” he said. “The minute it goes on his desk, it’s worthless.”

What the bank must do, he said, is look very calculatedly at the risk someone is asking the bank to take.

“And we want them to look at their proposal the same way,” he added.

He recalls teaching business plan seminars for the chamber of commerce several years ago. He said such programs — like the business plan instruction programs that GROW offers — are valuable in that they show would-be business people the reality before them.

“Sometimes,” he said, “they see that the reality won’t work.”

He said his staff also urges people wanting to start businesses to talk to a CPA with whom they feel comfortable.

“The CPAs know exactly where we’re coming from and they’re the ones who will tell the guy, ‘Look, you’re not being realistic.’”

Bankers might not be targets of so much bad-mouthing about heartlessness and ice-water-for-blood tales, he said, if dreamer-borrowers could see that banking is just like any other business.

“We’re not a social agency,” he said.

“We have to look at business proposals from this standpoint,” he said. “If we lend money to an entrepreneur and he is wildly successful, we get the interest. If we lend money and the venture dies, we lose the principal.

“Some people think such losses aren’t a problem for us because we’re so big. Well, look, this bank really is a small business. We’ve only been in Grand Rapids since ’82. That’s when we moved here from Wayland.”

The chief problem with would-be entrepreneurs who are trying to launch start-up businesses is that, through inexperience, they are known to make serious business mistakes. Those who hire help, he said, sometimes make the colossal error of not making quarterly withholding payments to the IRS.

And when judgment day comes, Kramer said it’s always the IRS that’s at the head of that line, with the bank in the back row maybe getting 10 or 20 cents on each dollar that it risked.

“Trying to assess who is a good risk and who isn’t is pretty subjective after a point,” Kramer said. “It’s a gamble.”

Loan officers, he said, are like everyone else. They are learning, and sometimes they make a mistake.

But speaking of his subordinates, he said, “They can’t make too many mistakes like that. They don’t have tenure.”

He said a lending officer starts up a kind of mental scorecard the minute the prospect comes in.

He said that if the prospect has lost his job and wants to start up a business to do the same work on his own, Kramer said, the bank is going to take a long, hard look at it.

“But if he’s coming in to buy an existing business with a track record — let’s say his boss wants to sell the business to him and retire to Florida — that’s something else. That’s an established business. It has a track record. And the prospective buyer certainly knows the business.”

Either way, he said, the prospect must undergo very careful background scrutiny, which will include some recent IRS returns and a look at how they’ve dealt with debt.

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