Community banks have been a lifeline for entrepreneurs during the recession -- one of the few places that small-business owners have still been able to get traditional loans.
But the Wall Street Journal not long ago took a look at how community banks facing increased federal scrutiny from regulators are also placing tighter scrutiny on their small-business customers.
During the worst of the recession, the Independent Community Bankers of America, an organization representing some 5,000 U.S. community banks, reported in March 2009 (PDF) that its members were getting more new customers than before the credit crisis. Just 11 percent of members said the economy was hurting their ability to make loans.
Community banks typically hold less capital than bigger banks, don’t leverage themselves as much and rarely get involved in subprime mortgage lending -- all of which helped them stay out of trouble. But eventually some did venture into this market, got into trouble and even closed down.
Community banks also tended to be heavily involved in commercial real estate lending -- a market that some experts believe is heading for a crash similar to that suffered by the subprime housing market a few years ago.
The problems have led to more scrutiny, with federal regulators demanding that community banks increase their capital and loan-loss reserves even further, call in the risky loans that are outstanding and be more cautious when making new loans.
What does this mean for business owners? In some ways, it’s back to the past. Community banks are looking for a lot more information about your business before they’ll give you a loan. And once you get the loan, you’ll need to stay in constant contact with your banker to keep them updated about your company’s ups and downs.
Many entrepreneurs are reluctant to give their bank bad news, but one banker cited in the story warns that when things are going south is exactly when you need to be honest with your banker.
Developing close relationships with community bankers was standard operating procedure 15 or 20 years ago. In fact, it’s one of the advantages that community banks have always had over bigger ones. And while it may be something of a burden, it can also pay off -- as evidenced by one entrepreneur whose story is told in the article. After switching to a community bank in search of a loan, he was told he’s need to open his books to the bankers, develop a good relationship and give them full access to his business, including touring the facility. He did as asked and got a $102,000 credit line -- but he still has to submit financial reports to the loan officers every month. He’s happy to do it, though, if it means the bank will be better able to defend his credit line when regulators question it.
Is jumping through these hoops worth it for you? If you want to get capital in the near future, it may have to be.