Think Global, Borrow Local
Every time you turn around, it seems like one big bank is merging with another big bank. Or, they're gobbling up smaller banks like they're going out of style. This leaves us all with mega-sized institutions with the willingness to increase fees and skimp on personal touches. So here's something you should consider: your local, community bank.
Small businesses, in particular, are in the best position to get the most from community banks. Community banks have remained competitive on price while also catering to the personal attention, flexibility, business understanding, and value-added services that small business owners desire. The points below outline how naturally suited community banks are to handling your business. I'll also tell you how to get the most from the experience:
Personal Attention. Community banks have fewer clients per employee and less turnover in lending positions. You can often expect your phone calls to be answered by someone who knows you personally, knows your account and knows how to handle your questions right away, rather than by a customer service rep looking at your account for the first time. Sometimes, you may even hear directly from one of the principals in the bank. (Bank presidents often want to meet new clients, and since many of these banks have just one office rather than many branches, it generally is not difficult to get in touch with the president if necessary.)
Try to get a feel for the personal attention you might receive from each bank you consider. This shouldn't be difficult - you'll have a gut reaction the moment you walk in the door: Consider how you are greeted and the type of response you receive the first time you walk in. But also ask some questions, such as how long the loan officer has been in the position with this particular bank or what type of person the bank president is. These will help you evaluate the relationship culture of the bank you will potentially work with.
Flexibility in Lending. At large banks, loan packages are often put together and then sent to a distant bank headquarters for approval. This is a time-consuming, laborious process for everyone involved. It is also an impersonal process that often uses credit scoring as a way to judge loan applications.
The big banks' process rules out other factors that contribute to the potential success of your business, as well as your ability to pay back the loan. In most community banks, the people to whom clients are telling their stories are the same ones making loan approval decisions. Most of the community banks I have talked to do not use credit scoring and place a larger emphasis on their trust in management and due diligence of the firm in making their lending decision. Since decisions are made locally, clients are likely to receive a decision on their loan (and the money) more quickly than they would at a larger bank.
One of the best ways to evaluate flexibility is to talk to other small businesses who are familiar with the banks you are considering. Most banks will have some sort of reputation with the small business community, good or bad. And small business owners will almost certainly have an opinion on banks. Also, ask the bank if it uses credit scoring as the basis for loan evaluation. If it does, this is an indication that the bank will be less willing to consider your individual situation as opposed to how your numbers match up to other businesses.
Knowledge of Small Business. Your community bank is perfectly-sized to understand your goals and operations. They understand how aspects such as the cyclical nature of sales impact the firm financially. One community bank I know insists that its lenders be well-rounded businesspeople rather than just order-takers for clients; lenders participate in strategic planning sessions for the bank and attend seminars on such things as employee handbook development. The lenders are expected to use this experience to better serve clients in putting the right financing package together.
Tap into this small-business knowledge by finding out whether the bank has done business with companies similar to yours. Perhaps they have already customized a loan package that could work for you. In any case, go into the bank with a business plan in hand - see how well the loan officer understands your business and the type of financing you might require right away.
Value-Added Services. Finally, some community banks are offering value-added services that are difficult to find at larger banks. For instance, some banks are offering seminars on strategic planning, benefits, and other topics for their clients. Some banks have also implemented document imaging, in which all of their bank documents are scanned electronically. That way, when a client calls in, a lender can immediately pull up their file with every bank document right on their computer rather than having to dig up a paper file - the client never sees this but benefits from improved service. These value-add services are difficult for larger banks to provide, simply due to the sheer volume of their clients.
Again, when looking for commercial debt, ask questions about the extras each bank can provide. This will be a good indication of how much the bank is out to serve its clients. Remember that you are a customer of your bank, and you want one that provides value to your business.
The point of this column is not to say that all community banks are good and all large banks are bad. However, I have encountered many entrepreneurs who have overlooked community banks as potential sources of commercial debt even though these banks generally have attributes that are important to small business customers. When shopping for a lender, consider at least one community bank and make your decision on more than just price. There will likely be other important differences between what you will get with a community bank versus what you will get with a larger bank, and you may very well find that a community bank is the best fit for your needs.
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