Twenty years ago there was very little choice and differences between banking institutions. Today, banks are offering more programs to small businesses than ever before. The list of banking “products” offered can be dizzying, from offering online banking to loans. In the banking community there is a belief the more services and products you use from your bank, the more loyal you are likely to be and the less likely you are to change banks.
For the purpose of this discussion I am going to divide banks into two groups, A) large national banks B) smaller community banks.
Examples of the large national banks include: Bank of America, Chase, and Wells Fargo. These banks primarily serve two kinds of customers; very large corporations that have large unique borrowing needs, and consumers. Simply put, these mega banks like to loan a large amount of money to a few very strong large borrowers, or they like to make millions of small loans to consumers via credit cards, home improvement loans, and personal lines of credit. For the most part, large megabanks do not serve the start-up business or very small business well.
These kind of borrowers aren’t large enough to warrant being assigned a commercial loan officer, so any borrowing needs occur by the bank’s use of credit scoring the owner of the business. If your credit score is above a certain threshold, the megabanks will often offer a small business owner a line of credit of $100,000. The problems with these kinds of lines of credit is that business owners often don’t know how to use them. They also don’t realize that teaser interest rates often only last for 6-12 months. There are no bankers assigned to your business that really understand business. Instead they are really sales people with a script of what the bank will do or not do. They most often can’t make decisions nor really influence decisions about your loan.. The also can’t offer real advice to you because they are often young employees of the bank in a near-entry level position.
My advice is to use the megabanks if you have no borrowing needs and they can provide some service to you that smaller banks can’t. An example would be if you often do international currency transactions. Big banks are great at these type of transactions.
If your business has borrowing needs, or you believe it will have to borrow at some point in its life, the better choice is to find a community bank. Community banks are significantly different in their operations than are mega banks. Look around in your area. Community banks tend to serve a geographical market, usually extending within a few hundred miles of their operations. Some community Banks can be large and may have over $1 billion in assets, though there is nothing wrong with community banks that are start-up banks either. Often start-up banks, called “de novo” banks, are hungrier for profitable loans than their larger brethren.
The fundamental characteristics you should look for in a community bank and your loan officer are:
1) Pick a loan officer who you can get to know and trust. Someone who has experience with helping businesses both during good and bad times. Make a point to take your banker to lunch or otherwise meet with him/her on a quarterly basis. This allows the banker to hear directly from you what is going on in your business.
2) Pick a loan officer who sits on the credit committee or at least has a lot of influence in the lending approval process. This makes your loan officer an advocate for you and your business.
3) Consider your loan officer one of your businesses’ trusted advisors, along with your CPA, lawyer, and insurance professional. If you don’t have a complete group of trusted advisors, ask one of the ones you do have for recommendations to others. It is particularly nice when your banker knows your CPA and has the ability to pick up the phone and call them to discuss your business.
4) Look at a bank’s loan decision making structure. Don’t be bashful about asking loan officers how lending decisions are made. Are they made by committee, or do certain individuals have lending authority up to a certain threshold.
5) Ask other business owners about the reputation of a bank. Not all community banks are truly small business friendly. Banks that have a high percentage of business loans to total loans are best.
6) Look at the bank’s other services that are offered. Some community banks can provide all the newest services that the megabanks can. One community bank I am aware of only serves businesses. They don’t have any consumer accounts. They have no tellers and only one branch. They service the entire state of Texas and have found extremely creative ways to do business with companies hundreds of miles away. For example, this community bank will place at their expense a small machine in your business that allows you to scan your own checks for deposit. You can make a check deposit without ever leaving your business. When a customer needs to visit an actual location, they visit one of the megabanks with locations all over Texas. The megabank has a relationship with the community bank miles away to take a deposit or handle a transaction in person.
I am not trying to bash the megabanks, but my experience in banking and as a business owner has always been that the relationship you can make with a real person in a community bank makes all the difference in the world in terms of having a bank and banker that will help your business rather than hurt it.
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