It is common for small businesses to look to big banks for their lending
needs, but small businesses are often turned down by big banks due to
inadequate credit scores. However, community banks lend to small businesses
more often because of the closer relationships they create with small business
owners.
“Since small firms are the source of most job growth in the
country, and since the bulk of small business credit is primarily from banks,
institutional change that results in less small business credit is a
potentially major economic issue,” Steven G. Craig, PhD and
Pauline Hardee, PhD, of the department of economics at the University of
Houston, wrote in a study that examined how banking consolidation has affected
small business credit. “The importance of small banks to small businesses
is shown, for example, that in 1999 small business loans were 25.5% of all bank
lending for institutions with less than $1 billion in assets. On the other
hand, for banks with assets over $5 billion in assets, small business loans
were only 7.85% of total lending. If all small banks are absorbed by large
institutions, and if these loan shares hold, the amount of credit available to
small businesses potentially could plummet due to consolidation into large
institutions.”
Choose the right bank
Whether looking at banks for a loan or a checking account, it is
important that the bank you choose is right for your business.
© 2012 Shutterstock.com/3Dstock
According to the Independent Community Bankers of America, community
banks have their own advantages over big banks. Community banks focus attention
on the needs of local families, businesses and farmers, channeling most of
their loans to the neighborhoods where their customers live and work to help
keep local communities growing. Community banks also are willing to consider
character, family history and discretionary spending when making loans, while
big banks mainly focus on credit scoring without regard to individual
circumstances, which may make it harder for small businesses to be approved for
a loan.
“[Whether a small business receives a loan] has a lot to do with
the way community banks make lending decisions vs. big banks. What most large
banks are essentially doing is feeding information into a computer modeling
system, sort of like credit scoring,” Stacy Mitchell, senior
researcher with the Institute for Local Self-Reliance, told O&P Business
News. “Since small banks have loan officers who are actually looking
at every application, they rely on a lot of soft information: their own
knowledge of the local market, their understanding of the borrower and their
ability to look at the particular business plan. All of this information makes
local banks better able to judge credit risk and safely extend loans to a
larger range of small business borrowers than big banks can.”
A common misconception is that community banks do not offer as many
resources as big banks. According to the Institute for Local Self-Reliance,
“Most locally owned banks and credit unions offer the same array of
services, from online bill paying to debit and credit cards, at much lower cost
than big banks. Average fees at small banks and credit unions are substantially
lower than at big banks, according to national data. Studies show that small
financial institutions also offer, on average, better interest rates on savings
and better terms on credit cards and other loans.”
“[Small business owners] should do business with a bank that’s
most likely going to give them a loan,” Mitchell said. “If you have
your checking account at a local bank then they have a relationship history
with you. That will come into your favor if you apply for a loan with that bank
because they can look back and see the kind of balances you have kept and how
you’ve managed your account over the period that you’ve been a
customer there.”
Lending resources
Searching for the right bank for your small business banking needs does
not have to be as hard as it sounds. Many online resources can help small
business owners quickly and easily find the right bank for their business.
The Move Your Money project seeks to educate consumers about the ins and
outs of big banking vs. community banking. The campaign aims to help
individuals and institutions to move from the nation’s largest Wall Street
banks to local community banks through a checklist and bank finding tools,
which can be found on their website.
Another company that provides small business lending resources is
Banking Grades, a new grading tool from MultiFunding where small business
owners can type in their zip code, city/state or country to find the best bank
for their small business lending needs.
MultiFunding chief executive officer and founder, Ami Kassar,
told O&P Business News that the online grading tool was created from
“a general personal frustration about the lack of transparency and clarity
about what’s really happening with small business lending.” By
dividing bank’s small business loan balances — loans worth a million
dollars or less — with domestic deposits reported to the Federal Deposit
Insurance Company, Kassar and colleagues grade each bank’s small-business
lending performance. Banks receive an A when they use 25% or more of their
total domestic deposits to make small business loans. Banks that use under 3%
of their deposits to make small business loans receive an F.
“We would read press releases from big banks about how great their
small business lending records are, but their words and actions were different
when we would interact with our clients who had spent weeks or months in a big
bank only to be [told they could not get a loan]. We felt there had to be a
better way to help the small businesses find banks in their neighborhoods and
communities that are lending,” Kassar said. “The goal of Banking
Grades is to make it easier for small business owners and entrepreneurs to get
loans and to find partners and allies who can support them and work with them
to reach their objectives.” — by Casey Murphy
References:
Banking Grades. Available at: www.multifunding.com/bank-search. Accessed
June 29, 2012.
Craig SG, et al. The impact of bank consolidation on small business
credit availability. Journal of Banking and Finance. 2007;31:1237-1263.
Independent Community Bankers of America. Community Banking Advantages.
Available at:
www.icba.org/communitybanking/index.cfm?ItemNumber=556&sn.ItemNumber=1744.
Accessed June 29, 2012.
Institute for Local Self-Reliance. Top 5 reasons to choose a community
bank or credit union. Available at:
www.ilsr.org/top-5-reasons-choose-community-bank-or-credit-union/. Accessed
July 9, 2012.
Move Your Money Project. Available at: www.moveyourmoneyproject.org.
Accessed July 2, 2012.
Disclosure: Craig, Hardee, Kassar and Mitchell have no relevant
financial disclosures.