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What Kind of Bank is your Bank?
This “labeling” may not be new to the FDIC reports, but understanding the different types of banks the FDIC has classified by asset is valuable to a small business owner looking for a loan.
Remember, as you think of banks, their balance sheet looks the exact opposite of a small business’ balance sheet. Loans for a small business are a liability, but loans for a bank are an asset. It is often the case that a bank may make all of these classes of loans, but have a higher concentration of one kind of loan asset that causes it to be officially or unofficially classified as a specialty bank.
Here are the asset classes the report shows and my explanation of each type:
Credit card banks
These are banks that have most of their loans in consumer credit cards. We have all heard the names and received mail solicitations from these banks. Most of them are headquartered in states that have very liberal credit card usury laws. South Dakota is an example of such a state. With the recent passage of the new federal laws protecting consumers (not businesses) from predatory credit card practices, we may see many of these banks change their primary model of doing business.
International Banks
Usually larger money center banks, these banks specialize in cross-border transactions. They may make large loans to foreign banks, businesses, and even sovereign governments. They are not thought of as small business lending institutions.
Agricultural Banks
Ag banks come in all sizes with most of them serving farming and ranching communities. There are a few special ag lending banks that are may serve the agricultural lending needs of an entire state. As one might expect, most of their loans are agriculturally related. Small businesses located in rural farming communities may be able to borrow from ag banks since these banks most commonly serve the entire community’s needs, not just agriculture.
Commercial Lenders
These are the banks that have staffs that understand the needs of businesses. Some of them may be regional banks (with total assets greater than $1 billion) and some may be community banks (with total assets less than $1 billion). If you ask a banker what percentage of their total loans are commercial and industrial (in the industry called C&I), you will get a feeling of how serious they are about commercial lending. The higher the ratio, the more serious the lender is about making loans to businesses. These banks also make consumer loans and other types of loans as well, so this kind of bank is often the hardest to find among banks in your community.
Mortgage Lenders
This asset class refers primarily to residential mortgages, not commercial mortgages. Since these lenders are primarily engaged in mortgage lending, they don’t have “Main Street” locations, you would locate one by contacting a mortgage broker or asking a real estate agent.
Consumer Lenders
As the asset class name suggests, these are banks that focus most of their lending efforts on consumers. They may have some business customers as depositors and borrowers, but their most desired loan is one for the purchase of an auto, boat, residential lot, or other typical consumer product. Banks that fall into this class may make very small business loans and typically do so on the personal financial strength of the owner. They often use credit scoring for making small business loans and don’t often take a holistic view of the business.
Clearly one must be careful to use such labels when talking about a financial institution, though these labels are used within the banking community themselves. One label that is slang for a bank that takes in assets and doesn’t lend much money at all is “bond bank.” A bond bank is one that invests its cash in U.S. treasury bonds. They make a small profit for their shareholders but don’t take much risk.
When picking a bank for your small business one of the best ways to find one is to ask your peers. Talk to a lot of other business owners and find out what they like and dislike about their bank. Knowing that banks often unofficially specialize in different types of lending will help you find the best bank for you.
Sam Thacker is a partner in Austin Texas based Business Finance Solutions.
You may contact Sam directly at: sam@lesliethacker.com
or follow him on Twitter: SMBfinance
EXTRA: If you have questions for Sam regarding business financing, the credit market, and similar issues, please send an e-mail. Your questions will be recorded and Sam will answer the best ones in his Ask the Expert podcast show.
