Little Lenders

Small banks may be your best bet

With their willingness to lend, and their often personal relationships with entrepreneurs, community banks have long come through for small businesses. That's still the case, though in these credit-crunch days small business owners may have to do a little more shopping around to find a friendly lender.

Banks with less than $10 billion in assets held 26.2% of total commercial and industrial loans as of mid-2007, but they accounted for an outsize percentage of small ones: 48.7% of loans of less than $1 million, according to the Federal Deposit Insurance Corp. In a 2007 survey by Greenwich Associates, a financial market research firm in Greenwich, Conn., small business owners ranked community banks on average as more willing to lend and offering better terms on loans than large and regional banks. Although practices varied more among community banks than in the other categories, "the most aggressive community banks are far and away more aggressive than the mega or regionals," says Christopher McDonnell, an associate at Greenwich.

Unlike large banks that collect fees for investment banking or asset management, small lenders get the bulk of their revenues from the spread they make on loans, which is the difference between how much they pay on deposits and how much they charge borrowers. "Community banks focus primarily on small businesses, mom-and-pop operations, and consumers," says Camden R. Fine, president and chief executive of the Independent Community Bankers of America, an advocacy group. "Because the footprint [of these banks] is a single town or a small cluster of towns, they know their customers really well."

And small banks are more likely to look beyond the numbers on an application and give businesses with less-than-perfect balance sheets or credit histories a better shot at a loan. "Smaller banks have a flexibility advantage in underwriting vs. the larger banks, which, because of sheer volume, are making those decisions on a more automated basis," says William Calderara, executive vice-president at Fairfield County Bank, a Ridgefield (Conn.) lender with $1.5 billion in assets. At Fairfield, for example, any loan rejected by the automated system nonetheless goes up the ranks for multiple reviews by loan officers and executives.

Even so, many small banks are tightening their lending standards in response to the credit crunch. It's true that most didn't take as big a direct hit during the subprime mortgage crisis. But many do make loans to small homebuilders or contractors, businesses that have been affected by the housing slump. That's one reason smaller banks are seeing more nonperforming loans—those that are 90 days or more past due. In the third quarter of 2007, nonperforming loans for banks with less than $10 billion in assets stood at 1.05% of their portfolios, up from 0.66% a year earlier.

Barry McCarver, senior analyst at Stephens Inc., a Little Rock-based investment bank, expects those problem loans to continue to rise over the next couple of quarters, prompting many small banks to scrutinize loans more closely. "In this environment, banks are taking extra care and time [to approve loans]," says McCarver. For entrepreneurs, that may mean you will have to get to know a few more bankers before finding one who says yes to your loan.

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