January 30, 1997
By Stephen J. Glass
Last June at the White House Conference on Small Business,
President Clinton praised the U.S. Small Business Administration
(SBA). The loan-guarantee program of this small federal agency, he
said, is the best way to get venture capital into the hands of
America's entrepreneurs. The SBA followed up with a report
identifying the most "small-business-friendly" banks in the
country. Among the nation's very best: First Capitol, in York,
But First Capitol is no example of how the federal government
builds what Clinton called tomorrow's Intel, Apple, and FedEx.
Instead it shows how banks can boost small business better without
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 a meager 1.5 percent. By contrast, the default rate on SBA loans
in the area is 6.2 percent. The SBA default rate nationwide is even
First Capitol's clients include high-tech startups, construction
companies, retail franchises, and mom-and-pop grocers. They 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.
And First Capitol does it without allowing the SBA or any
government agency to guarantee its loans. "Why should we?" asks Tom
Capello, First Capitol's president. "We pick winners."
Since the bank was founded in 1988, it has specialized in loans
to small business start-ups. When Thom Anstadt showed up on First
Capitol's doorstep with a proposal for his Colorgraphics Inc., a
high-quality color printing firm, he had been turned down for a
loan by countless banks. The reason: According to Anstadt's own
proposal, Colorgraphics would lose money for at least
one-and-a-half years because of its high start-up costs. Most
scoffed. It was a loan, some bankers said, that the SBA would never
But First Capitol did. The now-profitable printing firm has 22
employees and $2 million in yearly revenues. It not only has met
every loan payment, but it has borrowed three additional times to
expand. Anstadt's story is typical of First Capitol. York,
according to a top city official, is having "a small-business
renaissance because of that bank." How does First Capitol do it? By
counting on character.
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 government. These banks
make money just by making loans. First Capitol only makes money if
the start-ups succeed. And First Capitol has found the best way to
determine if a business will succeed 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: "The first 'C'
To this end, Tom Sauer, the bank's chief loan officer,
personally reviews each application. He and his staff spend hours
talking with each applicant about their business. He even meets
with their families to make sure they'll have the necessary
Most important, Sauer was not trained as a banker. Before coming
to First Capitol, he had managed a local munitions factory.
Although Sauer modestly says his background ensures he "won't bump
into the machines" when he tours businesses, it also means he
understands them. "The other [banks] I applied to just looked at my
numbers," says a local grocer who got a loan from First Capitol.
"That doesn't tell them much. [Sauer] would smell the fruit to make
sure it was fresh. He walked the aisles. He knows what I'm
Ultimately, each loan applicant also meets with Capello. First
Capitol has found that by letting even the smallest applicants meet
with the bank's president strengthens their commitment to meeting
It works. Since March 1994, more than three-fourths of the
bank's loans have gone to small businesses. In that same period,
the bank's stock has risen more than 60 percent. And, the trend is
upward: Profits in the third quarter were the best ever -- 48
percent better than 1995.
First Capitol thrives, not in spite of their SBA-free policy,
but because of it. The rigidity, paperwork and snail's pace of
SBA's textbook loans often invite failure in the real world. At
First Capitol, flexibility and emphasis on character rather than
business experience pays off. Even President Clinton has conceded
that the SBA is holding small business back. Small businesses, he
said, needed less paperwork and less regulation to thrive.
Banks like First Capitol prove small businesses can get what
they need, without the SBA's help, in the private sector.
This essay by Stephen Glass is adapted from his article in the current issue of the Heritage Foundation's magazine Policy Review: The Journal of American Citizenship.
ED013097a: Who Needs The SBA?
Stephen J. Glass
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