Small banks are small businesses, too. And they pay it forward. When you keep your checking or savings account--yes, even those of you with what you perceive to be "small change"--with a local bank, that bank loans it to local business owners (among other borrowers). The Small Business Administration defines "small business" in a striking number of ways, but generally it is a business with fewer than 500 (in some industries 100 or 1,000) employees. According to 2004 census data, these small businesses create more jobs than mid-sized and large businesses combined. Your deposit in a small bank could mean one fewer person in the now-staggeringly long unemployment line.
Small banks make significantly more small business loans than large banks, relative to the number of deposits they hold. While small banks hold only 12% of the country's deposits, they make 20% of America's small business loans. When it comes to loans for truly local businesses--loans under $100,000--small banks back an impressive 50% of them. And since the Small Business Administration estimates that half to two-thirds of new jobs are created by businesses with fewer than 20 employees, these small loans are critical to our growing economy. And this isn't necessarily because big banks loan all their funds to big business: large corporations, after all, predominantly borrow in the form of bonds or commercial paper, rather than bank loans.
Small banks not only loan more money to small businesses; they also help keep them in business by providing tremendously valuable advice. In the urban corporate world, big companies turn to professional consultants--large accounting, law, or investment banking firms--for advice on tax, legal, or other business strategies. Those brilliant consultants are either unavailable or unaffordable to small business owners. The community bank, instead, fills the shoes of all of the above. In advising their customers, small banks are also far more likely than big banks to meet with their business customers face-to-face, while the large banks tend to provide assistance over the phone, email, or mail.
Small banks are able to advise their commercial customers because small bank lenders know their customers and they are intimately familiar with the community in which the business operates. Economists call this "soft information," but this term undersells the value of a long-time lender-borrower relationship. Soft information is, for example, knowledge that a borrower has tremendous experience in an industry even if he may not have significant personal wealth or a long credit history. Soft information is knowledge that a borrower is the kind of person who will go to extraordinary lengths to repay a debt. Without small banks taking the time to learn this information, many small businesses simply wouldn't obtain loans, since large banks require financial reporting and other standardized information that many entrepreneurs struggle to produce. After all, they are experts in their businesses--farming, small manufacturing, making pizza--and not necessarily finance.
If small banks are making so many small, labor-intensive loans, then how can they also make a profit? One way is through long-term relationships. Customer turnover, like employee turnover, is costly. While large banks depend on high volumes of customers chasing "hot money" (ie, good, temporary deals on rates or terms), small banks try to stay out of this game by maintaining long term relationships, thereby keeping down advertising and interest rate expenses while encouraging bank officers to satisfy existing customers. These relationships promote higher repayment rates from borrowers, and also help banks make more knowledgeable, creditworthy loans.
Small banks also save money while providing better service to small businesses through their simpler organizational structure. Because small banks tend to be organizationally "flat"--that is, they have fewer levels of management--small businesses can obtain loans, renewals, and extensions of credit in a more timely, less stressful way. This benefit came to mind recently as I watched a credit-worthy friend endure a refinance with Bank of America that took nearly three months! It was a pathetic display of inefficiency, ineffectiveness, and just plain bad service. And I can't imagine how a massive organization with a byzantine structure can provide timely, consistently helpful service to small businesses.
Small banks are the number one source of funding for the country's greatest source of new jobs: small businesses. Help tip our fragile economy toward a bold recovery by moving your money to a local bank.
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