After the financial crisis, many Americans felt duped by the banking industry. Complex derivatives, sub-prime loans, and mortgage securities all felt like big business trickery to shuttle money from Main Street to Wall Street.
At the same time, these giant financial institutions are often the primary providers of financial services to businesses and individuals from coast to coast. Even if you feel outrage over Wall Street excesses, you may feel compelled to do business with these very same firms.
Fortunately, you do have options. If you are considering a small business loan, here's how to get your financing without going door-to-door on Wall Street.
Big banks make a lot of small business loans, but they're not your only option
If you're in the market for a business loan, it's easy to start with the big banks. They have well established brands, huge advertising budgets (to make sure you're well educated on their brand), and they make a lot of small business loans.
The largest small business lenders in the U.S. are either megabanks or large regional players.
|Bank||Small Biz Loan Volume (Q1 2015)|
|1. Wells Fargo||$34.8 billion|
|2. Bank of America||$33.0 billion|
|3. JPMorgan Chase||$19.1 billion|
|4. US Bancorp
This fact is misleading though because these mega-sized institutions are, in fact, so large. There's just no way that the three or four branch community bank in your town could possibly originate $30 billion in small business loans. To do that kind of volume you need thousands of branches all over the country.
But that doesn't mean local institutions don't make the kinds of loans your business needs. For many small community banks, loans for working capital, equipment, or facilities are the bread and butter of their business.
Looking at the small business market in aggregate using data from the FDIC, as opposed to the single institution approach above, it turns out that community banks as a group held about 45% of the total small business credits at banks as of the first quarter.
Community banks offer many distinct advantages
In my view, the best reason to borrow locally is that you're supporting the local economy. A loan from a megabank profits the corporate interests on Wall Street. It doesn't help to promote development in your city or neighborhood.
Community banks, on the other hand, are in the business of accepting local deposits and then reinvesting those deposits as loans to local consumers and businesses. It may sound hokey, but the spirit of the Bedford Falls Building and Loan in "It's a Wonderful Life" still exists at many small banks across the country. Your business will support local jobs and community development.
Along those same lines, a community bank will oftentimes offer you more flexibility in your financing options when you first borrow the money as well as in those unfortunate times when money may be tight. The reason is that a community bank is much more likely to view you as a neighbor, instead of a number on a spreadsheet. Neighbors are human beings with families, relationships, and character; numbers on a spreadsheet are assets written in black and red.
Don't forget credit unions
Another local alternative are credit unions, which are generally known for their mortgage lending. Increasingly though credit unions are offering small business loans to members as a complimentary product to their core mortgage business.
Since the financial crisis, credit unions have actually seen somewhat of a boom in business lending. From year end 2010 to year end 2014, credit unions saw business loan balances increase 39%. Banks saw a 4.4% decline over the same period.
At the end of the day, you should pursue the financing that makes the most sense for you and your business. At the very least though, take the time to comparison shop between a few options, including some local community banks and maybe even a credit union or two.