Magazine article American Banker

Small Business Scoring on End Runs around Banks with New Kind of Stock

Magazine article American Banker

Small Business Scoring on End Runs around Banks with New Kind of Stock

Article excerpt

Bill Rowe, the owner of Willie C's Cafe and Bar Inc., didn't go to a bank when he wanted financing for two new Tex-Mex restaurants in Kansas.

It's not that Willie C's isn't bankable. With $7 million in 1995 sales and a track record, it's the kind of business many banks would be willing to finance.

Instead, Mr. Rowe went public, sort of. Willie C's sold $950,000 worth of stock directly to 423 Kansas residents through a "small corporate offering registration," or Scor.

Scors are a rare but increasingly popular form of financing that allow small businesses to go directly to the capital markets, rather than seek bank loans.

Though Scors are mostly used by undercapitalized companies that can't get bank financing, a movement is afoot among small businesses to broaden the reach of this innovative financial tool.

Such a movement would be a direct threat to banks. It harkens back to when large corporations gained access to the capital markets, gutting what had been a core business for banks.

Now, even as banks target small-business owners, entrepreneurs are figuring out ways to make banks obsolete.

"The bankers say 'no,'" Mr. Rowe said. "The investors say 'maybe' - and if you ask them long enough, they will give you money just to go away."

"If you are a small business trying to grow, the last thing you need is to write an interest-payment check on the first of every month," said David Pinkus, president of Small Business United of Texas, a small-business activist group and a proponent of Scors.

Typically, the stock is marketed and sold by the entrepreneurs. Sometimes they hire local stock brokerages, but for the most part the entire process - from documentation to corralling investors - is done by the business owners.

Scors are still far from being a widely used financial instrument. As of Sept. 30 only 132 U.S. companies had fully funded their business expansions with a Scor offering. However, nearly 200 Scor applications were filed from October 1994 through September 1995.

But small-business bankers who attended a recent conference on Scors sponsored by the Federal Reserve Bank of Dallas say they aren't very worried.

Genny Rakowitz, vice president of Frost National Bank in San Antonio, said small businesses that sell stock will still need bank financing.

"If I were a small-business owner who could get financing from a bank, I would do it," said Ms. Rakowitz, whose bank is a unit of Cullen/Frost Bankers. She characterized Scors as helpful to current bank customers who would not qualify for bank loans.

Ms. Rakowitz said bankers have difficulty lending to start-ups or business with little capital. She said bankers would be more inclined to lend to businesses after they issued stock.

Collin Aldrich, banking officer for small business at $91 million-asset First Waco National Bank, said entrepreneurs who circumvent bank loans would still need credit cards and cash management products.

"They don't have to come to the bank for financing," Mr. Aldrich said. "We have other products here."

Scors are the equivalent of an initial public offering for companies that are too small or too young to be listed with the Nasdaq small-cap market. …

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