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This article appeared in Columbus Business First on Friday, February 14, 2003. It is reprinted in its entirety with the permission of Columbus Business First, a publication of American City Business Journals of Charlotte, NC. (


Banks are doing business to make money, not loans

“Bankers are in business to make loans, John, so why won’t they lend my company money?  When CEOs ask me this question, I state, “Your underlying premise is flawed.  Banks are in business to make money, not loans.” 

Then I ask them to consider how bankers view the loan product.  Indeed, borrowers like the loan product much more than bankers do. 

Compare borrowing money from your banker to renting space from your landlord.  Think of your banker’s loan portfolio as your landlord’s building.

Your landlord bases your rent on an estimate of the building’s future operating expenses, which might change significantly during your lease. 

The building’s most successful tenants outgrow their space, move out and must be replaced by new, unfamiliar tenants.  The least successful ones can’t afford to move, struggle to make their payments and likely become collection problems.

For you, having office space is essential; for your landlord, attracting the best tenants is the challenge.

Your banker sets the price (interest rate) of your money lease (loan) to cover the funding costs and credit risk, which can change dramatically after the loan closing.

A loan portfolio’s really strong renters (borrowers) often prepay (move out) and must be replaced with new, high-quality renters.  Otherwise the portfolio would consist largely of collection problems.

While the loan is crucial to your business, finding the strongest borrowers is crucial to your banker.

Pity the SSB

Even a loan portfolio of very strong borrowers, however, does not make for a very rewarding banking business.  Loan spreads are thin.

The Federal Deposit Insurance Corp’s latest data for Ohio’s 201 commercial banks show they’re making just $4.36 before taxes on every $100 they lend.  But they charge off 99 cents of every loan, so their net lending margin is a paltry $3.37.

Over my 30 year banking career, my least-profitable clients were those borrowers who purchased no other services.  They made their deposits, wrote their payroll checks and invested their excess money elsewhere.

In bankerspeak, these customers are called SSBs, for Single Service Borrowers.

SSBs are a bank’s least-desirable customers because they only use the lowest-yielding product.  All the bank’s other financial services generate returns that far outstrip the margins from lending.

Loans today are like free razors given away to sell blades.  The loan is a high-risk, low-returning product that bankers use to open doors to sell more lucrative products.

It is also what borrowers need most.

Banks must sell nonlending services to reach the level of returns that shareholders demand.  Ohio banks are especially adept at this.

The return on equity for the state’s banks is 19.3 percent, versus 14.8 percent for the nation’s 7933 commercial banks.  

Bankers’ best commercial prospects desire a broad array of noncredit financial solutions. This is why so many private company owners stumble when they ask solely for the loan.  Because they tend to focus solely on capital raising, this is especially true for smaller companies.

Fortunately, many local banks specialize in small-business lending.  Some have departments focused solely on this sector.  They recognize their behemoth relationships grew from initially rather inconsequential clients that bought an increasing number of services and didn’t move out.

The loan’s the lever

Regardless of the bank, you’ll improve the likelihood of obtaining credit if you focus on the bank’s need to sell enough higher-yielding services to supplement the loan’s yield.

Review all the financial services you’re now buying, especially from non-banks.  Research the services your bank can provide.  Offer to bring as much nonborrowing business as you can to your bank.

Though buying many services cannot overshadow a badly blemished credit profile, it will make it much easier for your bank to provide the capital you need.

ACTION STEP:  Ask yourself how you stack up as a loan portfolio tenant.  Other than paying rent on money, what revenues do you generate?  Can you obviously continue to make your payments?

Remember that banks are not in the business to make loans, but to make money.

The loan is just the lever.  They must use it as the springboard to cross-selling your relationship up to an acceptable level of profitability.

John O. Huston, a former Chief Credit Officer and bank CEO, is President of USPrivatecompanies, LLC of New Albany, Ohio. Reach him at 614-939-1503 or

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