The government strictly regulates banks in order to minimize the risks associated with insuring the deposits. Consequently, lending policies for small businesses and startups have a tendency to be very conservative.
Banks can be generically separated into two categories:
- Large Commercial Banks: They are a possible source of financing for businesses that have the best (lowest) credit risk.
- Small Community Banks: This type of bank is still the best type of lender for the average small business with a fair to good credit history.
Large Commercial Banks
Large commercial banks traditionally have not been a good source of financing for startup businesses. Nonetheless, a large bank can be a good financing source for a business that has been operating profitably for a few years.
Large banks are starting to target small businesses because that segment of the lending market is growing and lenders are becoming more competitive. Regional and national banks are increasing their community involvement by creating units that actively seek local business, contribute to small business seminars, and support local events related to small businesses.
Larger banks have the resources available to develop technology that will reduce the time and cost of the application process. Larger banks typically do this through an initial screening by custom-made computer software. The initial review of the loan application may lack the personal involvement considered essential for a businesses needs, but this review enlarges the availability of money and makes lenders more competitive with respect to loan rates and terms.
Even though large banks are now competing for small business borrowers, their ideal customer is a bigger-small business. They want to loan to businesses that have a proven track record and a considerable amount of collateral. Large banks are still very conservative lenders who require substantial records. Some banks require more than 100% collateral for any loan. The automated review process for business loan applications does not favor small businesses. The process doesn’t look at unique attributes or businesses that have a deficit in an area on the loan application. Larger banks are still not a key participant in small business finance with the exception of secured loans and mortgage financing. It can be worth it to look at a big bank, but your local lender is still probably your best chance at receiving financing..
Small Community Banks
Small, community banks are often your best option for small business financing. Smaller institutions have a tendency to be less formulaic in reviewing loan applications and are usually willing to consider individual factors.
Smaller businesses should try to establish an ongoing relationship with a bank. This can happen before the business is created, or soon after. A good way to form a relationship with your banker is to set up a small line of credit. This is a good thing to do even if your business does not immediately need the funds. The longer the relationship and the more familiar the lender is with the borrower, the more likely the needs of your small business will be met. Even if you apply for a line of credit and don't use it, you'll build up a positive impression of your business.
Every small business can benefit from the knowledge of an experienced banker. Your choice of a lending institution should reflect this and take this possible advantage into consideration when choosing a bank.
© 2001 Missouri Innovation Center