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Non-bank lenders boom
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August 14, 1996: 6:47 p.m. ET
More small businesses are turning to non-traditional lenders for money
From Correspondent Howard Nielsen
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BOSTON (CNNfn) - Despite a healthy economy and a simplified government loan program, many small businesses are finding it difficult to get financing from the usual business lenders. Now they're turning to non-traditional, non-bank lenders.
In its first 15 months, Philip Chaves' Mailboxes Etc. franchise in Somerville, Mass., doubled its earnings projections.
Business was so good that he and another franchisee decided to open two more stores. But their application for a $270,000 Small Business Administration loan was turned down by three banks.
"What troubled us is that they didn't want to sit down with us and talk with us about what are plans were and see how we run our stores," recalled Chaves. "They just wanted to look at the numbers."
He finally got SBA financing from a non-bank lender. Two years, ago non-bank lenders were virtually non-existent. Now they are making major inroads.
According to Tom Kellogg, president of Business Lenders, banks have not been meeting the special needs of small businesses.
"They've been focusing on other markets and achieving the economies of scale that go with mergers and acquisitions." said Kellogg.
The largest small business lender in the country isn't a bank. It's The Money Store, which last year made almost 1,500 SBA loans totaling more than $440 million.
Nationally, SBA lending has grown from 24,000 loans totaling close to $9 billion. Patrick McGowan, regional director for the SBA in New England, tallied the rise in his area.
"We had about 7,000 regular bank lenders participating with us. About 35 non-bank lenders participated with us nationally but that 35 accounted for over 15 percent of our loan volume," he said.
The SBA's streamlining program has drastically cut paperwork and guarantees 80 percent of the loan if the borrower defaults.
Bankers like Mike Glavin, director of community investment for the Bank of Boston, worry that less stringent underwriting standards of non-bank lenders could lead to more defaults.
"If that's the case, that's not in the best interest of the small business, not in the best interest of the community, and certainly not in the best interest of the SBA programs." Glavin said.
Despite the growth of non-bank lending, nationwide traditional banks are still major players in SBA loans. Bank of Boston is the largest small business lender in Massachusetts, followed by Fleet Bank.
So far this fiscal year, which ends Sept. 30, those two banks combined have issued more than 200 SBA loans valued at over $20 million. 
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