The Pros and Cons of Using Community Banks

Banking has become a niche-oriented industry. If you have a startup or a young or fast-growing business, it helps to understand what community banks specifically have to offer you.

A common definition of a community bank is one that has less than $1 billion in assets. Most community banks have a more personal feel than the larger bank behemoths. But does that mean they are right for your business? To determine whether a community bank is a good choice for your business, consider the following pros and cons based on the stage of growth your business is in.

Startup Businesses

There are several pros to banking with smaller community banks. Their loan officers are often involved in the local community, even if that simply means a small section of a big city, so you are more likely to get to know your banker as a person at a community bank, and this will help later.

When you have a small startup, every check you get is critical. Big banks often have an iron-clad 90-day period when you first join where they hold all checks over $100 for seven days. After that they will likely not give you deposit credit for five to seven days. Small community banks, however, tend to be flexible on this issue.

Community bankers typically review your entire credit report when you apply for a loan or a credit line rather than simply look at your FICO credit score. You may have good credit and still have a low credit score, so this can be particularly beneficial. Many large lenders simply look at your personal credit score when deciding whether to lend you money.

But like all banks, community banks are less likely to loan money to a business that is under two years old. There are certainly exceptions, however, such as when you have a strong net worth or your business is highly capitalized.

Many community banks over the years have sold out and merged with their big brothers. Nearly all of the small-bank personal service goes away when that happens. Staff turnover occurs and big bank policies go into effect. So if you become a community bank customer and feel comfortable in your relationship, understand that it can all change with a sale.

Young Growing Businesses

In addition to all the benefits mentioned previously, loans are much easier to obtain from community banks once your business has surpassed the two-year mark. This is the stage that most community banks like for new businesses to be in when they take them on as customers. In most cases community banks will not treat you as a little fish in a big pond.

But at this stage you may need services a community bank can’t directly assist you with, such as having branches in other cities where you do business.

Rapidly Growing Businesses

Community banks pay attention to the value of your cash deposits and may offer you more services and better rates for other loan services. But if your company is growing at a compounded annual growth rate of more than 20 percent, the rapid growth will make the bank’s lending group nervous unless your net margin is very high. You may have to use a combination of bank financing and commercial finance to fulfill all your borrowing needs.

Small business owners often are surprised when they realize how much time they spend working with lenders and how often they have to change their method of financing during their business’s rapid-growth period. That’s why finding the right bank for your business is an important step in your company’s growth.

Sam Thacker is a partner in Austin, Texas-based Business Finance Solutions.