When it comes to getting a small business loan, does it matter whether the bank you borrow from is a small bank or a large bank? The New York Times reports that larger banks are making fewer SBA-backed loans to small business, leaving the market open to smaller community banks. But do smaller banks do more for small business?
Ami Kassar, CEO of MultiFunding LLC, thinks they do. In an article on Huffington Post, Kassar was quoted as saying:
“I’d rather deposit my money into a bank that is more likely to take that money and lend it out to other small businesses that need it than to a large multinational bureaucracy that is far less likely to make loans to small businesses that help the economy.”
But do community banks really contribute that much more to their local economies than larger banks with dozens of branches in a single city? Chase, for one, provides grants and investments in communities each year. So does Bank of America. And with deeper pockets than any regional bank could ever have, is it fair to criticize larger banks for not understanding small businesses simply because they’re not small themselves?
Who’s Willing to Lend?
MultiFunding, which advises small businesses on the best loan for their situations, recently came out with a bank lending grader tool. Using the tool, you can find out how small-business friendly different banks are. The tool rates 6,800 banks in the United States. The tool calculates the rating based on quarterly FDIC call reports, as well as the total small-business loan balance for each bank divided by its total domestic deposits.
It assigns each bank a grade (A, B, C, D or F). Most banks (82.5%) get a grade of A or B, meaning that they use at least 10% or more of their deposits to make small business loans. About 1187 of the banks use less than 10% of their deposits to make small business loans — they got ratings from C through F. Figures are based on data as of June 30, 2011. Kassar says:
“The tool will help small business owners find banks in their areas that are most likely to make small business loans. This way they don’t have to waste time at banks that say they’re lending – but aren’t doing their fair share.”
MultiFunding’s tool does not give insight into how much a bank gives back to a particular local community.
How Should You Rate A Bank Lender?
MultiFunding’s tool is a place to start. The information is valuable and takes only a minute to look up.
But Rohit Arora, CEO of Biz2Credit, says there are other ways to judge a bank when looking for a small business loan. He notes these key questions you should ask when you’re considering a loan:
- What is the bank’s underwriting criteria? (credit scores, number of years in business, etc.)
- What industries does it fund?
- What age of business does it want?
- Does the bank make SBA loans or is it a non-SBA lender?
- Will the bank fund startup loans?
The key is to do your homework. Look at a variety of resources out there. The SBA website gives you a checklist to determine what sort of loans or financing you qualify for. If you want assistance finding a loan, consider working with a company like MultiFunding, Biz2Credit or Intuit Loan Finder to work with a loan expert. And there’s plenty of content online, such as what’s found on Paychex’s brand new Build My Biz site.
Bank Photo via Shutterstock
Joel Libava
Nice job on this one, Susan.
It’s the 1st time I’ve read a post that asks this important question.
Thanks!
The Franchise King®
I can understand why banks might not want a high percentage of their loans to be small business loans (they are slightly higher risk than other types of loans) but I agree that large banks seem to turn up their nose at many small business loans without good justification.
@Joel–
Thank YOU!
@Robert–
It’s a weird relationship; they should be supporting us!
Happy holidays to you both!
Susan
In 2009, Wells Fargo took away the credit lines of ALL of their small businesses – hundreds of thousands of them, without so much as a notice letter and, by their own admission, without looking at the credit worthiness of a single business. I personally know a few owners who were driven out of business in a matter of a couple weeks by this action after being in business for 20+ years.
They used this credit line just like giant corporations do, to fund short term monthly supply purchases, which they repaid in full every month. Without that credit line, they were out of business in no time. Thousands of businesses were driven under by this tactic, and tens of thousand were crippled for years to come by it.
Tens of thousands more of these businesses that needed short term credit started borrowing from their personal credit line at Wells Fargo. Only AFTER each of them ran up the credit on those personal lines, Wells Fargo then jacked the interest rates exponentially. I heard about this from so many business owners I decided to put a few thousand on my unused Wells Fargo personal credit line. It was in the low 6% as an unused line, but as soon as I put the thousands on it, they jacked it to 14%. I knew some people who had theirs jacked much higher.
Most of the large banks did similar things to their small business “customers” during this time.
We find out who people and businesses are, not in times of prosperity, but in challenging times. That’s when the real character comes out. The big banks have all shown who they really are; and who they really are doesn’t bode well for small business.
FYI – don’t believe their “we’re lending more to small businesses now” line. They include businesses up to 500 employees in that figure and also ignores that fact that their small business lending (even including that absurd 500 employee figure) is half of what it was in 2006 relative to their total deposits.
See my blog post on why I’m leaving my giant bank, Wells Fargo, and why I didn’t do it earlier – http://chuckb.me/x59 . We’ve picked Colorado Community Bank for both our companies.
Anita Campbell
Chuck, this is where I think the rating system of MultiFunding is interesting. What I like about it is that it at least gets you thinking about one question to ask: how much of your deposits do you give back in small business loans? The rating system is not fail-proof — it all depends on how the banks report their information. But at least it starts to train people to ask the question. A lot of business owners tend to think “a bank is a bank” without realizing the vast differences in focus and approach among them. When you are seeking a small-business loan or line of credit, a bank is not just a bank. It pays to investigate.
– Anita
Anita,
Couldn’t agree more. We need more groups like Multifunding watching the banking system statistically. It’s too easy for them to make claims that get picked up on by the press without vetting.
The advantages the giant banks have always had were more advanced technology and greater reach. The joy of ecommerce and the ongoing spread of high-technology services is that the giant banks have fewer of these advantages, and without them, they are heavily exposed to the relational advantage of smaller banks with a deep commitment to relationships.
The world is getting smaller, and if the government/Dodd-Frank doesn’t make it impossible, banks will once again do the same.
Matt Sullivan
Susan – I love the idea of rating banks based on their small business lending. Aside from rating banks, small business owners should also be cognizant of alternative ways to access financing.
Sometimes it’s smarter to set-up leases for individual equipment needs and then get a loan for working capital. This way cash flow is preserved and the business isn’t over extended.
There’s also micro-loan programs popping up, like what Boston Beer Company is doing with their Brewing the American Dream Fund (blog.directcapital.com/uncategorized/alternative-funding-options-for-your-startup-business/).