Tire Kickers Have Value After All

In an earlier post, I noted a negative attitude among some lenders toward new businesses. The banker referred to them as Tire Kickers, implying the hand holding and risk associated with startups isn't worth his time.

I continued to research this and came up with a very interesting study published by the Small Business Association Office of Advocacy May 2007 here.

Here is the Conclusion:

The Value to Banks of Small Business Lending
By Joe Peek, University of Kentucky;
Lexington, KY 40506-0034

VI. Concluding Comments

This study has investigated the extent to which relationship lending enhances the market value of banking organizations. As our proxy for small business loans, we use commercial and industrial loans and commercial real estate loans with an original value of $1 million or less. We find that small C&I loans add more market value to the smallest banking organizations than do larger C&I loans, although the differential effect is not found for the larger bank size classes.

This suggests that at least for small banks, the added revenue associated with relationship lending exceeds the added information costs associated with evaluating and monitoring small business loans. Furthermore, the effect appears to be emanating primarily from the smallest size category of C&I loans, those with original amounts of $100,000 or less.

In contrast, while small commercial real estate loans add value to banking organizations, small CRE loans do not appear to enhance the market value of banks beyond that from CRE loans generally, even for the smallest set of banks. One explanation for these contrasting results is that CRE loans represent transactional rather than relationship lending; being based on collateral rather than superior private information about relationship borrowers makes the advantages arising from information-intensive relationship lending less important.

Our direct evidence that small business lending is a profitable market niche for small publicly traded banking organizations in the United States suggests that such banks should actively participate in lending to small businesses. The evidence is consistent with these banks having a comparative advantage in originating and monitoring small business loans compared to larger banking organizations. Thus, consolidation of the banking industry, insofar as it takes the form of the acquisition of smaller banking organizations by larger banking organizations that are less focused on small business lending, may be value destroying, and thus not in the interests of the shareholders of the acquiring banking organizations.

So there you have it. Small bankers stand to benefit most from relationships with small startups. It's curious, in an age where data is king and credit scores are ubiquitous, startups are difficult for many banks to understand. We don't have the numbers, the data behind us. We don't show up on their radar very well. We have stealth potential.

That's where relationships comes in. The people who want to do business with us, need to look at us as people in addition to scouring the data and tallying scores.

Perhaps we're not just numbers after all.

NewBizMinn

(nfp)