Overall, large businesses have performed well over the past few years. This is in no small part due to the support received from the Federal Reserve in the aftermath of the financial crisis. Small businesses on the other hand are barely growing at all. This is a serious problem because small firms account for about half of GDP and employ the majority of the workforce. Furthermore, most small businesses employ fewer than 10 employees, thereby limiting their financing sources to either the owners’ capital or bank financing.
Small businesses continue to be hindered in their ability to hire, build up inventory, purchase real estate and invest in capital equipment by a lack of financing. As a result, small business activity remains weak and never saw a recovery like larger businesses. This one-sided economic recovery is leading many analyst to call the overall slow growth in our economy the “new normal.” The end result is that access to capital is one of the biggest challenges small business owners face.
As a result, small business owners need to carefully consider where they seek out financing. One of the best places for small businesses to look for bank financing is at small community banks. Many smaller banks focus on real estate-backed loans and SBA-backed small business loans within the 7(a) program. These banks realize that many small businesses might not meet the strict standards and requirements set by bigger lenders, so they look beyond the typical requirements. Here are the main reasons smaller community banks might be the best place to look for those struggling to find financing.
First, community lending decisions are made in the community. The smaller nature of these banks allows the entire approval process to begin and end with bankers who live and work in the same area. Everyone involved in the lending process is invested in helping the small businesses in the community.
Second, these banks often consider your personal character and history. Community bankers will consider the businesses management team, if they are current on their existing obligations, the nature of their products, and how well the business has managed through tough times in the past. Remember however, that part of the reason banks will consider your personal character and history is because these loans almost always require a personal guarantee on behalf of the business owner, therefore putting your personal assets at risk.
Third, small community banks appreciate what it’s like to be a small business. Their banking institutions started as small businesses and in many cases still are. As a result, they understand what it’s like to be the little guy because in some ways they are, too.
As great as these aspects of small community bank lending can be, there are a few major downsides to the process. It is common for the approval process to take months, especially if the loan is connected with the SBA. Additionally, the paperwork can be complex, cumbersome and difficult to navigate. These two factors can be frustrating and discouraging to deal with, especially for business owners who are already stretched thin. Luckily, many community bankers are willing to help with the process.