The BizFilings blog covering business tips and trends.
Choosing a Community Bank: 4 Questions to Consider
Published on Apr 11, 2012
Read 'Choosing a Domain Name for Your Small Business Website' at 'Time to Start Up,' the small business blog by BizFilings.
Across the United States, a majority of entrepreneurs rely on community banks for small business financing needs. When deciding which community bank to work with - and whether a community bank is a better choice for your business than a big bank - it's helpful to address the following four questions.
1. What is my business profile?
Thinking about the industry your business is part of, your business model and your own identity as a business owner will provide further direction as you begin looking for a community bank. Many community banks specialize in working with particular industries, so you might seek out an institution with expertise in your sector. You'll also want to find a bank that is amenable to your business model; if you're running an online store from your home, your financing and everyday banking needs will be different than if you've just opened a diner on Main Street, and assessing how your business model is unique can raise questions that you'll want to address with a potential banking partner. Likewise, some small banks have expertise in working with particular types of business owners, such as women, minorities, veterans or people with disabilities.
2. What are my long-term goals?
In addition to finding a bank that can satisfy your immediate financial needs, it's shrewd to find an institution that you can work with down the line. For example, think about these three potential questions regarding long-term growth:
• Am I interested in selling my product overseas?
• Am I interested in obtaining a government contract?
• Am I interested in upgrading my facilities for better energy efficiency?
3. How strong are the bank's business fundamentals?
The notion of a bank being "too big to fail" has become a hot-button political issue, but the phrase does suggest the security of working with a major financial institution. With a smaller bank, do a little bit of basic fact-finding before entering into a relationship.
Two questions to ask:
1) What are the bank's underwriting standards? One major benefit of working with community banks is that they have more flexible lending practices than bigger entities. However, it's still wise to see what a community bank's baseline underwriting criteria are, such as the credit scores it looks for in a business borrower and the average lifespan of the businesses it loans to, to ensure the standards do not seem overly liberal.
2) What is the bank's capital level? Although smaller banks by definition don't have the same level of resources that national or global financial institutions do, they should of course still be appropriately capitalized. A bank's capitalization refers to its assets, such as outstanding loans, versus its liabilities, such as customer deposits. The capitalization of a bank can be ascertained from its call report.
4. What special services does the bank offer?
After finding which local banks fit the basic needs of your business and appear to be on a solid footing, you might consider the special services on offer. These might include:
Online banking. Increasingly, online banking is a necessity for small business. Community banks might only offer certain online capabilities and transactions might not be posted as rapidly as they are by larger banks.
Small business advising. Often, one perk of a community bank is more personalized banking, and to make the most of this, it can be a good idea to choose a bank with a dedicated small business counselor or personal financial adviser.
Merchant services. Certain businesses might benefit from a bank that can help diversify customers' payment options by processing transactions made in person, online or over the phone, via credit/debit card, gift card, electronic funds transfer and other means.
Although most small businesses weigh these four questions when looking for a community bank, the reasons why entrepreneurs choose to work with a particular institution vary greatly. Providing further insight into the decision-making process, the SBA solicited input from small business owners regarding why they chose their banks and posted responses on its website.