This paper examines the feasibility of launching a small business banking venture from a branch manager's perspective, using Kaiser Federal Bank as a case study framework. Drawing on more than twenty-five sources, the study addresses four core domains: financial management, marketing, regulatory compliance, and human resources. It reviews definitions of small business, the economic significance of the small business sector, and the role of the Small Business Administration's loan-guarantee program. The paper also evaluates relevant banking products and services, Federal Reserve Act definitions, staff training and retention challenges, customer care and attrition rates, and tax planning strategies, ultimately arguing that community banks stand to benefit substantially from well-designed small business banking programs.
What does this paper expect to accomplish in developing a capstone study relating to the factors involved in starting a small business banking venture? Answering this question requires the same process a financial manager or bank officer might implement: What are we trying to do? That question could carry more than one meaning. It may be one a bank officer asks a small business's current or prospective customer, or it may be the question a bank itself must answer when launching a small business banking program.
The goal of this study is to present a thorough review, from a branch manager's standpoint in terms of financial accounting, on the feasibility of starting a small business banking venture. Steps to complete this project included extensive research, appropriate analyses of findings, and ultimately the presentation of conclusions based on those findings.
Considerations for this study include:
Research Questions:
Researched sources retrieved and analyzed during the creation of this paper included more than twenty-five resources conveying components connected to the startup of a small business banking venture. Considerations included the examination of costs to implement various programs and the ensuing financial impact for the bank. Other factors consisted of determining potential marketing components: what products and services are feasible to introduce, what small business customers demand, and how the bank plans to market the program. For the regulation and compliance segment, contemporary rules and best implementation practices were investigated. The human resources section further explored required manpower, training, and related matters.
"Better informed people make better decisions" — the motto utilized by Kaiser Federal Bank — also serves as a lead proposition for this paper. Relating relevant information to customers, bank officials, and students empowers them to make good, better, and best decisions. This researcher therefore determined to relate information based on credible research to empower decision-makers regarding small business banking ventures, with particular focus on Kaiser Federal Bank, located in Covina, California.
The term "small business," according to Bannock (2005, p. 1), may not constitute a major issue in the economic realm; however, "the essential point is that 'small' is a relative, not an absolute concept and where the line is drawn in the continuum of businesses from 'momma and poppa' shops to General Motors is inevitably arbitrary." The Committee of Inquiry on Small Firms, chaired by John Bolton (Bolton, 1971), identified three characteristics in its economic definition of a small firm (Bannock, 2005, p. 1):
These three characteristics are found in the vast majority of all businesses, and therefore most businesses are small. However, the economic definition is of limited use for statistical purposes, since business statistics are not classified in terms of market share, owner-management, or independence. For this and other reasons, small firms are usually defined by number of employees (Bannock, 2005, p. 1).
The European Commission and a number of member states, including the United Kingdom, define small and medium-sized enterprises (SMEs) as those with fewer than 250 employees. Governments generally designate one definition for statistical purposes and may use sectoral, asset-based, or turnover-based definitions for specific policy purposes. Other countries' thresholds include:
Telberg (2003) reports the safest and riskiest small businesses, based on the percentage of profitable sole proprietorship businesses per category. The safest businesses included surveying and mapping, optometry, dentistry, CPA services, bus driving, special trade contracting, mental health practice, general medicine, taxi and limousine service, and residential building. The riskiest included hunting and trapping, scenic and sightseeing transport, animal production (including pet breeding), computer and electronic products manufacturing, commodity contracts brokerage, nonmetallic mineral mining, primary metal industries, video tape and disc rental, catalog and mail-order retailing, and health and personal care stores.
More and more, Craig, Jackson, and Thomson (2007) argue, policymakers perceive the small business sector as "a potential engine of economic growth. Policies to promote small businesses include tax relief, direct subsidies, and indirect subsidies through government lending programs." These authors stress that encouraging lending to small business is the Small Business Administration's (SBA's) primary policy objective for its loan-guarantee program. In their empirical study utilizing a panel data set of SBA-guaranteed loans, they cautiously conclude that "there is a positive (although small) and significant relationship between the level of SBA-guaranteed lending in a local banking market and future per capita income growth."
Cocheo (2006) posits that small business lending at a number of banks in California, as in other states, constitutes "big" business. Stephen H. Wacknitz, president, CEO, and chairman of Temecula Valley Bancorp — a small bank in Temecula, California, with just over $1 billion in assets during 2005, which finished as the 16th-largest SBA lender in the U.S. that year — contends, "Much of the business comes down to people." A big part of the banking equation in regard to small businesses, Wacknitz stresses, consists of customer service quality. In addition, "hiring and training people who can navigate the often complex SBA process makes that service better for borrowers" (Cocheo, 2006).
Fuller (2003) notes that small businesses provide employment for individuals in society and offer an alternative career choice for owners. "They are needed by citizens-as-consumers who demand customer service and choice that requires niche-oriented suppliers." Fuller (2003) presents a series of questions about the future of small business, including considerations about the importance of personal relationships in business transactions, personal commitment of business owners to solving customers' problems, and the role of individual entrepreneurship. His core argument is that in a society that values human spirit, personal relationships, and entrepreneurial commitment, small businesses will thrive — particularly because large businesses cannot replicate the personal commitment and flexibility that define the small business model.
Valentine (2007) stresses that smaller, community banks can increase profits by reducing operating costs while ensuring customers' needs are met. "Few things are easy," she notes, "but it's clear from the success of several small and midsize banks that cash management — and winning customers — is worth the effort."
According to Jeff Dick, president and CEO of a Herndon, Virginia-based bank, their institution successfully competes with the largest banks in the metro Washington, D.C. area by offering customers extras. Their sophisticated services include automated escrow management, image-based lockbox, and remote deposit capture, along with traditional cash management services such as wire transfers and the ability to download banking transactions into accounting software. Bulk check deposit ATMs — another new tool being incorporated into banking — permit consumers or businesses to simultaneously deposit up to fifty checks without filling out deposit envelopes. Key advantages for small business owners include real-time access to deposited funds, after-hours convenience, and an imaged receipt of deposited checks (Valentine, 2007).
Currently, "fraud costs the banking industry up to $1.5 billion each year" (Valentine, 2007). Because deposit envelopes are not necessary with the new bulk check deposit ATMs, fraud evolving from the use of empty deposit envelopes dissipates, and fraud costs for banks decrease. Additional savings are realized because the cost of processing a deposit envelope transaction through a regular ATM is reportedly $1.70, while it costs only $0.40 to complete a bulk deposit ATM transaction.
A sweep account is defined as "a bank account that, at the close of each business day, automatically transfers amounts that exceed (or fall short of) a certain level into a higher-interest-earning account" ("Sweep Account," 2007). A bank's computers analyze the customer's use of checkable deposits and then "sweep" designated amounts into money market deposit accounts. This helps the customer receive the greatest amount of interest while requiring the minimum amount of personal intervention. Initially, sweep accounts were created to circumvent an old government regulation that prohibited banks from paying interest on commercial checking accounts.
In his study, Scott (2006) "presents empirical evidence on the role loan officers play in facilitating small firm access to commercial bank loans." He notes that when a bank's loan officers use soft information to influence lending decisions not traditionally made on the basis of hard information, frequent loan officer turnover should be related to adverse effects on credit availability. Scott (2006) conducted surveys of U.S. small businesses — also members of the National Federation of Independent Business (NFIB) — using data from 1995 and 2001, to determine the role loan officers play in small firm credit availability.
For the 1995 survey, Scott (2006) initially mailed 18,000 questionnaires; 3,642 completed questionnaires were returned, contributing to a 20% response rate after the second mailing. For the 2001 survey, questionnaires were mailed to 12,500 firms, yielding 2,223 responses — an 18% response rate. From his findings, Scott (2006) concluded: "loan approvals based only on hard information could limit these firms' ability to obtain credit. Soft information obtained by the loan officer is likely to increase credit availability, but there are instances where it may not — for example, if the officer learns about internal control problems at the firm — and result in decreased credit availability." Scott (2006) stresses that relationship banking is linked with the loan officer's production of soft information as much as with the bank's accumulation of hard information. For small business owners and branch managers, these results indicate:
Owners of small businesses with limited hard information, according to Scott (2006), may benefit more from doing business with banks that have a history of stability in loan officers and local decision-making. The earlier a small business chooses a locally owned, community bank that focuses on relationship lending, the better. The length of time a small business conducts business with a bank also affects credit decisions.
"Deposit marketing, remote capture, and customer relationship priorities"
"Federal Reserve Act definitions and compliance cost realities"
"Staff training, attrition, customer care, and tax planning"
No matter the size, small businesses do matter — not only to community banks for the current profit they generate, but also for the potential for growth that small businesses present. The majority of large firms started out as small businesses:
You’re 33% through this paper. Sign up to read the remaining 3 sections.
Sign Up Now — Instant Access Already a member? Log inAlways verify citation format against your institution’s current style guide requirements.