The process for choosing a bank should be different for every small business. Although there are more than 8,000 federally insured banks to choose from, not all of them will provide the services appropriate to serve the needs of your particular business. A bank should not only be considered a means to obtain credit, but also as a business partner that is available to help you solve your small business problems.
The question that should be asked when choosing the right bank for your business is whether you are better off with a large national bank with billions of assets, or a smaller community bank that serves the needs of small business in your local area. Because of their size and resources, larger banks may be able to provide services at lower costs then community banks that provide more personalized programs.
The specifics needs of your small business should help you determine what type of bank is best for you. The following are factors that you can use when deciding on whether a community bank or larger institution is right for your business:
The Amount of Credit You Need:
If you are a larger business and need large loans in an excess of say $1 million, a smaller community bank may not have the resources to accommodate you. Many bank regulations restrict banks from lending more than 15% of their assets to any single borrower. However, a small bank could still partner up with other small banks in the area to make the loan. In many cases, a smaller bank that understands the local business market may be able to underwrite the loan more effectively then a large bank. In this situation, it would be up to you to research whether a larger national bank could provide the same amount of credit at more favorable terms then a syndicate of smaller banks.
However, if you are like most small businesses and need a more modest loan of say $100,000, a national bank may not be interested in doing the loan or may have to charge exorbitant origination fees to make it worth their while. For the larger banks, since the work involved to originate the loan is equivalent to that of a smaller loan, small businesses must pay the same fees as if they were borrowing significantly more. Another reason the cost could be higher is because the large banks require loan guarantees from the Small Business Administration in order to make smaller business loans. In this situation a smaller community bank that is used to making smaller loans in your local area may take the time to review your business credit and provide the financing you need at the best possible terms.
The Status of Your Business Credit
Many small businesses do not attempt to establish their business credit before applying for financing. Although as a small business owner your personal credit may also be part of the loan review, it is often business credit that will determine if the loan is made. Your overall business credibility and your business relationship with vendors and customers will have a great impact or whether a lender perceives any risk in giving your business credit. It is important that owners establish and maintain their business credit profile before beginning the application process with lenders.
The status of your business credit will also impact which bank to choose. National banks often make decisions formulaically because they do not have the ability to review the local market where you do business. National Banks will use financial statements and credit scores as the means to determine if your business is credit worthy. A smaller community bank will often consider additional factors and may even interview your vendors and employees to determine the financial health of your business. Since most lenders will not be able to review your business in detail, owners should attempt to establish their business credit files and control what lenders will review when extending credit.
In cases where your business credit is low or where your local bank is unresponsive, a national broker that has relationships with many different lenders may be helpful. In this situation, small business owners may need to be creative in finding other financing options such as obtaining an unsecured business line from a national lender. The penalty for not establishing your business credit in advance may be these more expensive financing programs.
Your Business Credibility
Your business reputation will always be a factor on whether your business can obtain financing or credit terms from vendors. Maintaining your reputation with the local community and online can help with obtaining financing from either a community or national bank.
If your business is well known and respected member of the community, your local community bank will take that into consideration when extending credit to you. If you own a firm that does most business in the local community, you may have more luck with a local bank that can determine your business credibility in the local market. Having a well established online reputation will also help when applying to a national bank that usually does its decision making far from where you do business. Either way, being able to demonstrate superior relationships with vendors, creditors, and customers will be an asset regardless of which lending institution you choose.
Your Current Banking Relationship
The decision on how to choose a bank should start with the bank that you currently do business with. If it is servicing your current needs well, it should be the first place to look for credit. Your current bank should understand your business well in order to provide it the best possible service. Since understanding a business is the best way to reduce credit risk, your current bank is much more likely to approve your loan application. If not, you may want to consider switching to one that not only provides you with financing but that can suggest ways to help you grow your business.
The decision to go with a smaller community bank or a larger national concern will likely be a function of cost and the lender’s ability to underwrite your business. Regardless of the type of bank you use, establishing good business credit and a solid reputation in the marketplace will have the greatest impact on your ability to obtain financing.