Going for Broker At the end of your rope for ways to finance your business's growth? Forget the usual suspects and try the last place you'd think of.

When Kevin Nikkhoo took the BIZ Experiencesial plunge in 1992, itwas with a modest amount of start-up capital--his own--that heco-founded Los Angeles-based Vertex Systems Inc. The technologyconsulting firm thrived without so much as a loan, providingtechnology solutions to the entertainment, manufacturing andfinancial services industries.

In 1999, however, Nikkhoo found himself in an unfamiliarsituation. Eager to position his company for significant growth andto capitalize on the booming IPO market of the late 1990s, heneeded a loan. He was also seeking a commercial lendingrelationship that extended beyond just borrowing.

"We talked to many organizations," recalls Nikkhoo,41, the firm's chairman and CEO. "We found that althoughthey were very interested in providing a credit facility, they didnot have the ability to scale up with us as we grew. If we neededto strategically look at the different areas we were going to gointo, we [needed] to feel comfortable that [the organization] couldprovide those kinds of services."

Nikkhoo found credit in his stockbroker's office, of allplaces. While meeting with a Morgan Stanley Dean Witter & Co.broker to discuss his personal assets, he learned the firm offeredcredit and advisory services to established businesses likehis.

In January 2001, Vertex Systems finally had its financing: along-term loan and credit facility from Morgan Stanley. While thecompany didn't go public, Nikkhoo felt Morgan Stanley'sexpertise with IPOs and acquisitions made it the ideal long-termfinancial partner for his $10 million company.

Brokering a Deal

While Morgan Stanley is a relative newcomer to thesmall-business financial services industry, its commercial lendingpractice is hardly unique. Merrill Lynch & Co. Inc. introducedthe first central asset account to consolidate checking, investingand borrowing for small businesses in 1986. Morgan Stanley andSalomon Smith Barney Inc. are now mining their own customer basesfor potential small-business clients. Their often friendlierlending procedures, account consolidation and other servicesintended to cut the clutter of running a business are effectivemarketing pitches small businesses are embracing. At the same time,bank consolidation has left some disgruntled BIZ Experiencess seekinga personal relationship with a financial advisor, which has alsofueled the financing trend.

This credit option isn't for the fledgling business, though.Minimum deposit requirements, typically $20,000, as well as lendingrestrictions on some industries-Morgan Stanley, for example,won't lend to restaurants, gas stations, hotels andconstruction firms unless they pledge securities ascollateral-favor a more select group of high-end small businessesthan typically found on a bank's loan roster. MorganStanley's standard client has been in business for five yearsand has sales of more than $10 million. As a minimum, businessesmust be at least two years old and have sales greater than $1million. Merrill Lynch, meanwhile, generally focuses on companiesat least three to five years old with revenues of at least $5million.

Merrill Lynch, which has tripled financing commitments to smalland midsized businesses to more than $6 billion over the past fiveyears, now ranks among the top 10 small-business financial servicesproviders, according to market research firm NFO FinancialServices.

Banks Still Have Clout

While brokerages are attracting small and midsized businesseswith convenient offerings, they haven't displaced banks. NFOFinancial Services research suggests BIZ Experiencess are still morelikely to go to brokerages for investment and cash managementproducts than for financing; the vast majority of brokeragecustomers still use a bank for some of their needs.

The brokerages have had success with larger small businesses andthose less dependent on a bank's branch-based service, saysCharles Wendel, president of New York City-based FinancialInstitutions Consulting. And while brokerage customers may findaccount officers more sophisticated than the typical banker,"the best banks have closed a lot of the gaps," Wendelsays, citing Citigroup, Wells Fargo & Co. and National CityCorp. as examples. "Because of the drop in interest rates, andbecause banks are better at marketing to small businesses, Idon't think there's a great advantage anymore."

Another potential drawback is the lack of local creditdecision-making, even for a "story loan," Wendelmaintains. "If the loan is complex, you're better offdealing with your bank. They have more of a local presence, and candeal with some of these issues more easily than a Merrill Lynchcan."

Access to credit wasn't an issue for Vertex Systems. Rather,finding a commercial lender that would advise the company oneconomic and growth issues was Nikkhoo's greatest challenge. Healso feared volatility in the tech sector might wield too muchpressure on a bank's lending decisions. "Everybody iswilling to give you money in an up market," Nikkhoo says."The challenge is when the markets get tough, how are banksgoing to react to the companies?"

Crystal Detamore-Rodman is a Charlottesville, Virginia,writer who covers the small-business finance market.

Contact Sources

• Financial Institutions Consulting Inc.
  (212) 252-6700
• Merrill Lynch Business Financial Services
  (800) MERRILL
• Morgan Stanley Commercial Financial Services
  (212) 310-6258
• NFO Financial Services
  (813) 637-0087
• Vertex Systems Inc.
  (310) 571-2222, ext. 222