Small business to large business: differences in lending practices: comparing how banks lend to small businesses, middle-market companies, and large c

The Small Business Customer: Hy & Dry Gutter Service

For the small business customer, the distinction between owner and firm is minimal, and commercial lending may seem more like retail lending, entailing many of the same requirements. Let's consider Hy & Dry Gutter Service.

Hy Roller has operated his small business in Springfield for six years and has $750,000 in annual sales. The Springfield branch of Hugo Bank has banked the company for five years, ever since Hy responded to an ad offering a free checking account and a below-market rate on an installment loan. His relationship manager is Bob Friendly, an acquaintance from community activities.
Hy requested a check-based $8,000 business line of credit, unsecured and renewable annually, to meet working capital requirements, as well as a $50,000 term loan to buy a building and a new Ford F-150 truck. He agreed to pledge the truck as collateral for the term loan, and the bank filed a mortgage on the building. While the borrower on both facilities is Hy & Dry, Hy personally guarantees both facilities. For the line of credit, he pays prime plus 1%on the line of credit, which has a 30-day "cleanup" period. The term loan has a 7%fixed rate and a five-year maturity with 20-year amortization. Bob had asked for a $500 fee on the term loan, but Hy considered the fee a breaking point for the relationship, saying he would contact Hugo Bank's competitors if Bob insisted on collecting the fee.

Before he received the credit facilities, Hy supplied Bob with his personal financial statement, personal and business tax returns, a business plan, and internally prepared historical business financial statements. Hy admitted that while he had done his best in preparing the personal financial statements and business plan, he was no accountant. After reviewing what Hy had supplied, Bob asked Hy a few questions about the numbers and accounts, but he did not dig too deeply into accounts Hy was clearly unfamiliar with. Bob also checked Hy's personal credit score, which was 725. The loan amount was within Bob's credit approval limit, and he was able to tell Hy that he would have the documents to sign and could give him his money the next day.

At the loan closing, Hy signed promissory notes for the line of credit and for the term loan, along with credit agreements for each, a mortgage, and a general business security agreement on the business assets. Hy was pleased that there were no covenants in the credit agreements, and he agreed to provide a copy of each year's business and personal tax return as well as financial statements whenever the bank requested them.

Hy and Bob were in frequent (business)contact when the credit facilities were first being approved, but not after. Hy was always busy at customer locations and had no need to talk to Bob; Bob called once to "check in " on the accounts, but Hy didn't see a need to respond. Hy used the bank's drive-up window and the ATM for deposits and cashing checks, and he mailed his monthly loan payment check to the bank's post office box. He also occasionally called the customer service number for transaction information. Bob's assistant sent a reminder letter each April, in response to which Hy mailed a copy of his tax return to Bob. When an acquaintance recently asked Hy where he banks, he replied that he banks with Bob Friendly at Hugo Bank.

Last week, Bob called Hy at home to say that he was now a commercial relationship manager at the Little Community Bank in Springfield. Bob said that Little Community Bank was a much better bank for small business people like Hy because everything is local--loan decision making and operations--and senior management is readily accessible. In fact, Bob wanted to introduce Hy to the bank's president, Sam Smart. Moreover, Bob wanted to propose to Hy a line at prime plus 0.25% and a mortgage at 6.25% fixed, with the maturity and terms otherwise the same. There would be no cost to Hy to switch the loans and open a business checking account. At their meeting, Hy agreed to switch his banking.

It's not that Hy feels any personal allegiance to Bob; nor did he have any problems with Hugo Bank. However, Bob had been helpful, Hy could save some interest, and Hy no longer knew anyone at Hugo Bank. Bob requested a payoff balance from Hugo Bank and sent them a check. Hy never talked to anyone at Hugo Bank to tell them he was thinking of changing his relationship, and he never said goodbye. Only after Hugo Bank was paid did Bob ask for financial information or have Hy sign any documentation. Hy wondered how Bob could move so quickly, but it really wasn't his concern.