Who Needs the SBA (1997)

Speaking last June at the White House Conference on Small Business, President Clinton praised the leaner, more invigorated, more committed Small Business Administration (SBA).of this small federal agency, he said, is the best way to get venture capital into the hands of America's entrepreneurs. Nine months later, the SBA followed up with report identifying the most small-business-friendly banks in the country. Among the nation's very best: First Capitol, in York, Pennsylvania. But close look at First Capitol doesn't reveal how the federal government builds what Clinton called tomor- row's Intel, Apple, and FedEx. Instead it shows how banks can boost small businesses better without government help. First Capitol Bank builds small businesses on character, trust--and good feel for fruit With three branches in central Pennsylvania, First Capitol has lent more than $50 million to local small businesses--15 percent of which are headed by women or minorities. Their loan default rate is meager 1.5 percent.Its default rate nationwide is even higher. First Capitol's clients include high-tech startups, construction companies, retail franchises, and mom-and-pop grocers. Its loan officers write business plans for their clients and meet with the entrepreneurs monthly, if not weekly. All this made First Capitol the fastest-growing bank in the region, boosting assets 16-fold from $5 million to more than $90 million in just eight years. remarkable, First Capitol refuses to get the SBA or any government agency to guarantee its loans. Why should we? asks Tom Capello, First Capitol's president. We pick winners. Since First Capitol was founded in 1988 with only card table and telephone in shared office space, it has specialized in loans to small businesses. Other banks had written off York as Rust Belt city doomed to sputter as the local Caterpillar tractor factory laid off workers. So depressed were regional expectations that no new bank had opened in York in nearly 60 years. First Capitol's founders saw the changing labor market as an opportunity to make money investing in startups. Character as Asset Ever since Thom Anstadt was in grade school, he had worked in his family's downtown printing shop. Eventually he and his uncle took over the company. When desktop publishing transformed the industry in the late 1980s, Anstadt proposed that the firm seek niche in high-quality color printing. His uncle balked at the change, so Anstadt quit the business to start Colorgraphics, Inc. Most banks are allergic to startups,would lose money for at least one and half years because of its high start-up costs. scoffed. It was loan, some bankers said, that the SBA would never guarantee. But First Capitol did. The now-profitable printing firm has 22 employees and $2 million in yearly revenues. It has not only met every loan payment, but it has borrowed three additional times to expand. Anstadt's story is typical of First Capitol. York, according to top city official, is having a small-business renaissance because of that bank. How does First Capitol do it? By counting on Unlike other banks, First Capitol doesn't get Washington to guarantee its loans. At other banks, if the small business fails, most of the lost money is reimbursed by the government. These banks make money just by making loans. First Capitol only makes money if the startups succeed. And First Capitol has found that the best way to predict business's prospects is to evaluate the owner's honor. While his competitors talk about the two C's of lending (credit and collateral), Capello has added another: character. To this end, Tom Sauer, the bank's chief loan officer, personally reviews each application. He and his staff spend hours talking with applicants about their businesses. He even meets with their families to make sure they'll have the necessary emotional support. …