A Matter of Real Interest

In Chicago, the Harris Bank gains lots of publicity for its small-business loan index, but few borrowers actually get the lowest rate

Small companies based in the Chicago metropolitan area may look forward to seeing Harris Bank's announcements of changes in their much-touted small-business lending rate whenever the Federal Reserve adjusts interest rates. After all, in the small-business market, where lending rates vary considerably, a bank's own benchmark index is something local businesses would welcome. But does the Harris' index have any relevance to actual lending practice, or is it simply a marketing tactic?

Harris, a regional bank with $29 billion in assets and $19 billion in deposits, regularly publishes its small-business lending rate, which tracks one-half of a percentage point below prime. "When you talk about a commitment to business, you have to convert it to something tangible," says Emilia Dimenco, executive vice-president for business banking at Harris Bank. "This was our way of demonstrating to our local market that we are committed to small business." The rate was 9% a year ago, but has dropped to 6.25% in step with the Federal Reserve's rate reductions.


  Harris introduced the Small Business Lending Rate index in 1994, replicating a concept developed in Canada by its parent company, the Bank of Montreal. "In the higher-end market, businesses have different alternatives to capital and a different pricing market," Dimenco says. "The small-business segment didn't, and still doesn't, have as many pricing alternatives."

Dimenco says Harris, which controls 12% of the banking market in the Chicago metropolitan area and is the third-largest bank in Illinois, has lowered its customer-attrition rate as a result of the small-business lending rate. "It makes our customers think: They're easy to do business with and they care about me," she says.

But while the rate generates good publicity for the bank, does it actually translate into cheaper loans for small business? In reality, only a handful of customers get the published rate.


  According to Dimenco, 30% of Harris's 45,000 small-business customers are current borrowers. Only 155 customers -- or just over 1% of the borrowers -- actually have loans out at the small-business lending rate. Other borrowers receive a rate based on that index. Between January, 2000, and May, 2001, 3,650 businesses have borrowed at rates based on the small business lending rate.

Promoting a small-business lending rate "may be a marketing strategy to get business in the door," says Mollie Cole, managing director of the small- and emerging-business division at the Chicagoland Chamber of Commerce, "but it's not Dr. Evil at work. If it gets the attention of the small-business owner, it's worthwhile."

Dimenco brushes away criticism that the bank gets more in the way of publicity than the customers get out of the loan rate. "The Small Business Lending Rate gives the opportunity for our small-business customers to borrow at sub-prime," she says, "and the majority of our customers like to borrow at a fixed rate."

Harris customer Kurt R. Schuldt, president of Maintenance Coding Co., a $3.6 million construction company based in Elgin, Ill., says that because the bank publishes the rate means there is an ideal small-business standard to aspire to. Schuldt has a $300,000 line of credit on which he pays 8.5% -- or 2.25% above the bank's small-business lending rate.


  Schuldt may not be borrowing at Harris' small-business rate, but he says he's happy with the rate he gets. "When you say you're in construction, the first thing bankers want to do is leave," Schuldt says. "So I really couldn't do better than this anywhere else." Harris' weighted average on loans of less than $100,000 is 9.2%, slightly below the national average of 9.45%, according to Fed data.

Small businesses have some things in common, but as far as bankers are concerned, they are all over the map in terms of size, profitability, and credit-worthiness. So while Harris may like to publicize that it has "lowered the cost of borrowing by establishing our own index for small-business loans," it is far from able to guarantee that loan rate for small businesses in the market for money.

By Naween A. Mangi in New York

Before it's here, it's on the Bloomberg Terminal.