Academic journal article ABA Banking Journal

Debunking Small Business Myths

Academic journal article ABA Banking Journal

Debunking Small Business Myths

Article excerpt

Some small-business lenders could do with a reality check, according to Jerry Bowman, executive vice-president in charge of Bank of America's Business Banking Division, based in Pasadena, Calif. In his speech at ABA's recent National Small Business Banking Conference, Bowman set out three myths he believes small-business lenders harbor, and skewered each in turn:

1. "The small businesses in my market are different."

Hogwash, said Bowman. The demographics and financial services behavior of small businesses are consistent across markets and across time. What may differ is the competition your bank faces locally, which can determine at what point a bank in that market can be doing small-business lening profitably.

2. "Small business is less valuable than the middle market."

Bankers who believe this aren't looking at the whole pictures, said Bowman, because his research finds that the value of the two segments is actually about equal, although the values derive from different sources. Small-business banking, he said, receives 25% to 30% of its revenue from lending but 60% to 65% of its revenue from the use of the deposits that small businesses bring in. Most such deposits are in noninterest checking accounts. And small-business deposits move less frequently than do consumer accounts, with a tendency to be less rate-sensitive than consumer accounts. Middle-market banking, by contrast, derives the bulk of its revenues from lending.

3. "Small business are mini middle-market companies."

This myth does not take into account a key fact concerning small businesses, Bowman insisted. Most small-business owners, he said, prefer to remain small because they prefer to work for themselves. In addition, he said, small-business customers are more like retail customers because they tend to place a high value on convenience.

He added that approaches to the two markets should naturally differ--there are 50 small business for every middle-market company, making the small business more of a volume-driven field.

How to beat the myths and succeed? Bowman offered numerous pointers, among them:

* One person must have overall charge of the small-business effort. …

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