Is a Community Bank Right for Your Business?

If your business needs a loan, you’ve got a boggling array of more than 8,000 federally insured banks nationwide to choose from. Are you better off at a large national bank with billions in assets, or at a smaller community bank in your town? That depends on your circumstances.

Here’s a look at some of the factors to weigh when deciding whether a community bank is right for your business.

What Size Loan Do You Need?

If you need a very large loan -- say, multiple millions -- a community bank with modest assets may not have the resources to help you, as bank regulations restrict banks to lending only 15 percent of their assets to a single borrower. A community bank may resolve this by partnering with other local banks on the loan, notes Bank of Tucson President and Chief Executive Officer Michael Hannley. Often, however, big borrowers will get a better reception at major national banks.

On the other hand, if you want to borrow a modest amount -- say, under $100,000 -- a national bank will likely not be interested. One reason: Major loan programs guaranteed by the Small Business Administration don’t tend to handle loans smaller than this amount, and large banks often require that the SBA guarantee to lend to small businesses. Also, a small loan requires as much paperwork as a large one, and a big bank may not find it worth the trouble.

How’s Your Credit Rating?

National lenders make their decisions in a formulaic way, relying mostly on credit scores, says Hannley. He notes that community banks often consider additional factors, such as a business’s reputation, as they evaluate loans.

If your credit score is low and your local bank is unreceptive, a national broker may help you explore creative financing options, such as obtaining an unsecured business line of credit from a national lender. This type of borrowing is more expensive than a traditional loan, but may be your only option if you’re turned down locally.

How’s Your Reputation?

If your business is a respected community institution, your local bank is a good bet. National banks usually make their loan decisions at a headquarters far from where you do business, so factors such as local reputation aren’t considered.

Restaurant owner Art Owens relied in part on his successful track record managing 20-year-old Buddy’s Grill in Tucson, Arizona, when he first approached Bank of Tucson in 2006 for a $910,000 loan to buy out his partners. Many of the bank’s managers were regular customers of Buddy’s Grill and knew Owens well, smoothing the way for loan approval. “They were aware of my standing in the community, my reputation, and my work ethic,” says Owens. He took out a second loan with the bank in late 2008 for $500,000 to open a second location.

Where Do You Bank?

Banks tend to lend to companies they do business with already. So if you have your business checking account or credit line at a local community bank, that should be your first stop when you’re looking for a loan. Likewise, if your accounts are at a national bank, they may be a good resource.

To improve your odds of success, develop banking relationships with more than one bank in town. Rebel Cole, a DePaul University professor of finance, says research has shown that your odds of receiving a loan -- and needing less collateral to get it -- increase if you have more than one established bank relationship when you seek the loan.

Try to do at least some of your banking locally, as local banks are more willing to work with small business applicants, Cole says, particularly when times get tough.

“With a national bank, you’re such an infinitesimal part of their business,” he says. “They don’t care if you go bankrupt or have to fire your 10 employees.”

How Much Collateral Do You Have?

If you lack collateral and need a loan that’s totally or partially unsecured, you may have to do a national search to find a bank willing to take you on, says Don Johnson, president of loan broker Diamond Financial Services in New Jersey. You may also need to explore creative options for capital, such as getting an unsecured business line of credit instead of a traditional loan. National banks are more likely to offer these options.

What Level of Service Do You Require?

Community banks are more likely to offer the personal service many small businesses need because they typically deal with smaller businesses and smaller loan amounts than the large banks.

“The difference between a community bank and a big bank,” Hannley says, “is [that at a community bank] you can pick up the phone and talk to the president.”

You can also ask for help when you run into trouble. When the recent economic downturn hit Art Owens’s two restaurants and sales declined, Owens was able to renegotiate his most recent loan with Bank of Tucson. He received a lower interest rate and was able to convert the loan to interest-only for six months to help Buddy’s stay solvent while business improved.

The bank did this, Hannley notes, even though the move required the bank to reserve 15 percent of the loan amount in savings, instead of the scant 1 percent required for untroubled loans. “I don’t know a national bank that would do that for a small business,” he says.

Business reporter Carol Tice contributes to several national and regional business publications.