When shopping for a bank to give you a loan, bigger isn't always better. Many community banks pride themselves on their role as small-business lenders. They tout their emphasis on relationships and community building.
During the worst of the credit crunch, when most big banks were too frozen in fear to lend even to each other, many community bankers still had their doors open to qualified small-business borrowers. Often boasting solid loan portfolios and sound lending standards, such banks weren't involved in the kind of risky securities that got the bigger institutions into trouble.
"They were the only ones lending in the spring," says Therese Flaherty, director of the Wharton Small Business Development Center in Philadelphia.
Small-business lending, including Small Business Administration loan programs, are an important business to community banks -- defined generally as those with less than $10 billion in assets. These lenders make one in five small-business loans, according to the Independent Community Bankers of America. More than half of small-business loans under $100,000 come from community banks, says the group, which also points out that nearly half of small businesses get their financing from smaller banks.
Even so, many smaller banks can't satisfy current huge demand for small-business borrowing.
"They're turning away deals that they would have done because they don't have access to capital," Flaherty says.
Small businesses are hoping that a new program just announced by President Obama will offer some relief. The plan is to release funds from the Treasury Department’s Troubled Asset Relief Program (TARP) to be used as loans to small community banks that would then turn around and lend the funds to qualified small businesses. Banks with assets of less than $1 billion are eligible to participate. What’s more, the administration is working to raise the limit on some popular Small Business Administration loans from $2 million to $5 million.
Community banks have a reputation for putting a greater emphasis on relationships than the big money-center banks. Their loan officers may want to meet you in person and look you in the eye. While these generalizations are often true, they're not always.
"Depending on the bank, your relationship will be more or less important," says Flaherty.
Community banks, usually locally owned, tend to focus on personal service and make their credit decisions at the local level, compared to some larger banks that might rely on a home or regional office. (Of course there is always the possibility that your local bank will be acquired by a larger outfit that may have different policies and procedures.) They'll often apply first-hand knowledge about your local economy and consider loans that don't necessarily fit inside the box of a bigger bank's loan criteria. They may try to devise a more creative solution to business problem and work with a proposal that a big bank would not want to get near.
If you're in the market for a loan, shop around and look at several banks.
"Invest the time," says Flaherty. "This is an important supplier relationship. It's an important business partner you're taking on."
Here are some key things to think about:
- Consider your plans for growth, particularly if you're looking to do business overseas. Is the bank equipped for it? "You don't want to keep re-establishing the relationship. If you're going to be a local business, local is OK. If you're expecting to do business in several locations, go with a bank who can handle it," she says.
- If you're doing business on the Internet, look at the bank's electronic payment offerings.
- Look at businesses similar to yours, assess their loan expenses, and compare that with what you're being offered.
- If you're going to be visiting the bank frequently, consider its proximity to your home or office. Says Flaherty, "Time is often the small-business owner's most precious asset."
