But when it comes to actually offering small business loans, many banks aren’t as Main Street-friendly in practice.
A recent article on the HuffingtonPost.com said that small businesses are increasingly turning to small banks for loans. The article also cited information from Biz2Credit that found that in June 2011, big banks approved 8.9 percent of small business loan applications compared with small banks which approved 45.5 percent.
Ami Kassar, CEO of the small-business-loan broker multifunding.com recently created a website called bankinggrades.com, which has graded every FDIC-insured bank in the country; a grade based on how many small business loans they make. He’s found that the banks with higher grades are often the ones nobody has ever heard of.
When shopping for your small business loan, do your research. Use sites like pfstock.blogspot.com, which offers tips and trends in the world of personal finance, SCORE.org, which has articles about forming a good relationship with your bank as well as an Amortization calculator, and ResourceNation.com, which offers a ton of advice on small business loans.
Finally, read on to learn whether a small bank or a large bank would work better for you.
Advantages of small banks:
- When evaluating a business owner for a loan, a small bank doesn’t rely as heavily on credit scores as a large bank does, according to an article on BusinessWeek.com. They also focus more on the business owner’s character and relationships, which often make a business owner look more creditworthy then they do on paper.
- Small banks are able to pay more attention to small businesses, according to BusinessWeek.com, which cited research that lenders with less than $100 million in assets lent 87 percent of their total loan value to small businesses; lenders with more than $50 billion in assets lent just 26 percent.
- Because they don’t make as many loans to large companies, smaller banks – and by extension the smaller businesses they loan money to – are not as affected by economic crises overseas.
- Small businesses can get tired up in bureaucratic wormholes when applying for loans through a large bank. Smaller banks are more in touch with their creditors.
- In a May article, Kassar told the Huffington Post, “Smaller banks are generally much better at making small-business loans than big banks. This is because the loan officers and the credit officers typically work in the same building and are able to work on a loan together and find the best way to get it done. Small-business loans typically require careful thought and creativity. There is almost always a twist. The smaller banks are much better able to handle this.” What’s more, larger banks often don’t want to be bothered with handling small loans when they can focus on loans for billions of dollars, instead.
- Smaller, regionally-focused banks have a better understanding of the local economy.
Advantages of large banks
- Larger banks are better equipped to offer cash management services, letters of credit for exporting, etc.
- Large banks do more than loan money – they also educate small business owners about putting together an attractive loan application and they offer networking opportunities and online resources.
- Rates charged by larger banks are generally lower, according to an article in the Wall Street Journal.
- Larger banks are more likely to offer small businesses corporate credit cards that can be used for financing, according to the Wall Street Journal.
- Larger banks can more easily accept riskier borrowers because they’re more often backed by the U.S. Small Business Administration, which subsidizes loans to help protect the bank against default.