While name recognition and their clout on Wall Street factor into the appeal of working with big banks, do those elements truly matter when considering your main priorities as a small business? Do you care about prestige or do you care about having a bank who will be willing to customize lending options to your circumstances and timetable? If you are a small business, the benefits of working with a community bank can far outweigh the flashy products and status of bigger competitors. While the needs of every business are unique, there are some recognized benefits to banking with smaller institutions.
1. WORKING WITH A COMMUNITY BANK GIVES BETTER ACCESS TO SMALL BUSINESS LOANS
Big banks have rigid requirements for their commercial loans and also take longer to approve. These requirements can include a whole slew of financial reports, credit reports, and in-depth information on the business owner’s personal and financial history. They also have rigid underwriting standards. Underwriting is the process of evaluating the risk associated with a loan based on the likelihood that an institution will either default or pay back what they owe. The newer and smaller a business is, the harder it will be to meet these standards. For a small business, your chances of landing a commercial loan are historically higher at a small bank which may be more willing to invest in your growth and potential. In many communities, small businesses, especially those in the start-up phase, are quite dependent on community banks for their loans. Community banks generate over 60% of loans to small businesses.
One type of financing tailored to the needs of small businesses are Small Business Administration (SBA) loans. These are loans guaranteed by the SBA who use lending partners like banks or community development organizations rather than directly lending to clients themselves. Being guaranteed means that the SBA guarantees a percent of the loan to lenders, eliminating some of the risk. SBA loans vary from $500 to $5.5 million. Each lender who offers SBA loans will have unique eligibility requirements and each loan program will also have varying requirements. Some can be used for working capital like revolving credit and some for fixed assets like machinery, equipment, or real estate. Two of the most common types of SBA loans are 7(a) and 504 SBA loans. You can talk to your preferred lender to see which program best fits your needs.
While many large banks may offer SBA loans, they do not need the business of small enterprises in order to survive and, owing to the higher risk and lower profitability, may not even discuss this option with their small business clients. If they do, the interest rate will most likely be higher to make up for the smaller request amount. In 2017, some of the bigger banks only averaged one or less SBA loans per location while single-location community banks (three were evaluated in this report) reported over 1,000 SBA loans each.
2. WORKING WITH A COMMUNITY BANK MEANS PERSONALIZED SERVICE
One survey conducted in 2019 found that good interest rates and feeling like the bank really understands their business needs are top concerns for entrepreneurs when they are choosing a financial institution to use for their business’s banking needs. Community banks can create more personalized possibilities for you rather than forcing you to choose from a cookie cutter list of options. They are able to get to know your needs and make suggestions based on your unique circumstances, customizing a plan to fit your business. It is likely you will work with the same few people throughout the life of your loan or deposit. This helps you know what to expect and you’ll always know who to call with questions (and that person will likely be available to help you when you need them). These relationships will lead to better service for you and your business and an allowance of flexibility that won’t be found at a megabank.
Another advantage of this personalized service is that decision making for loans happens locally. There isn’t an intricate web of bureaucracy keeping you from getting what you need, when you need it. Because of this complexity, many big banks have tried to simplify approvals with online applications that are designed to accept or reject your request automatically. At a small bank, whether or not you get approved is not just based on submitting your credit score into an automated application. Local banks will take into account your standing with them, what they know about your business, and where they see you going. While there are certainly still loan policy standards, you are less likely to be rejected outright for not meeting part of the criteria like having high enough collateral, for example.
3. SMALL BANKS CAN WORK FASTER
Because of decision-making being locally based, business owners don’t have to wait around as long for the loan they need. Extended wait times will affect your cash flow and ultimately the success of your business. This is especially difficult when, after a wait time of weeks or months, you end up being denied anyway. Some banks boast getting an answer back to you within a day but this would be through those automated applications we discussed above which aren’t as friendly to small business situations. It is worth noting that SBA loans can take up to a month to receive approval on and require lengthy documentation but going to an SBA preferred lender can really speed up this process. Other loans can be acquired within a couple of days without all the hoops that big banks have to jump through.
While the requirements are often less rigid when working with a community bank, you will still want to be prepared for the loan application process by having a business plan, knowing your budget, and being aware of your assets that could be used as collateral. Having your financial affairs in order before applying for any loan will speed up the process, no matter what type of loan you’re applying for.
It’s true that big banks lead are leaders in developing financial technology, also known as fintech. This technology can make a customer’s banking experience quicker and easier. However, small banks are surprisingly quick to follow suit on adopting new industry-standard technology. One American Banker article discusses how this can really be a benefit of community banks: while technology is expensive to create, is it cost-effective to replicate or purchase. Therefore, community banks can focus their budgets and attention directly on the customer and relationship-building.
4. LOCAL BANKS ARE INVESTED IN THEIR COMMUNITY
While the quality of community outreach will probably never be the deciding factor in who you bank with, it can deepen the sense of trust and unity with your bank to know that they are investing back into your community. Additionally, if your local economy is thriving, that will be better for your small business in the long-run. Big banks and their offices may have branches in communities throughout the country but they are commonly detached from the needs of those communities and how they can contribute. By depositing into a community bank, you know that the loans your business will generate will most likely be for other small businesses and community entities. If you find your business with extra money on hand, consider opening a deposit account with a bank that is committed to using those funds to lend to other small businesses.
Some small banks reinvest in their community through school financial literacy programs and other activities to support the next generation. Some commit special efforts to help small businesses in particular disadvantaged neighborhoods. Small banks will usually invest in impactful, strategic outreach rather than one-time giving so that they might take a meaningful role in community development. Funds and employees are deployed for volunteer services to meet the needs of outreach partners. The leadership of community banks are often on local community boards and are dedicated to the success of their depositors, borrowers, and the community-at-large.
As your company grows, moving to a big bank might begin to make more sense for your business-to-business dealings. In the meantime, as a small business with big plans, working with a community bank could be the best strategic move you can make right now.
