Should You Work with a Community Bank? Here Are the Pros and Cons

As we all know, any new presidential administration comes with ambiguity about which policies will stay consistent and which will change. As a country, we’re waiting to see what the Trump administration will do on many fronts, but one subject that could impact your small business more than you might know is financial regulation.

The Trump administration has moved quickly to roll back financial industry regulation, putting the fate of community banks back in the spotlight. Advocates of such moves argue that Dodd-Frank regulations have created an unnecessary burden for community banks—jeopardizing an important financial resource for many small businesses.

What does all this talk mean for you? Well, since community banks can be an essential financial partner for small businesses, this ambiguity might be troubling if you’re in the market for a new bank or business loan.

To help, we’re breaking down some of the benefits and drawbacks of working with community banks in today’s uncertain environment to help you make the best decision for your business.

First Things First: What’s a Community Bank?

A community bank is a bank that is locally owned and operated.

That means that they obtain most of their deposits locally, and they make the majority of their business loans to local businesses. Community banks are usually relatively small in size, with assets under $1 billion.  

The Benefits of Working with Community Banks

Community banks are the backbone of small business lending in many communities, with approval rates of close to 50% for small business applicants, compared to 24% approval rates at big banks.[1]

But aside from the fact that they’re more likely to lend to small businesses, what are some of the benefits of working with a community bank?

1. More Qualitative Underwriting

One big difference between community banks and big banks is their approach to underwriting.

Community banks tend to take into account qualitative information for a more holistic, personalized evaluation of the business, whereas large banks use more of a cookie-cutter approach.[2] While large banks rely solely on a borrower’s FICO score and financial statements, community banks are more likely to review an entire credit report. That’s great news for small business owners whose credit scores are low but who have solid credit history.

2. A Personal Relationship

For small business owners, a personal relationship with a bank can also be a huge advantage. The personalized service at a community bank makes it easier to tailor your financing to your business needs over time and leaves room for flexibility on things like interest rates. Big banks, on the other hand, have standardized rates across the board.

3. A Connection to Your Community

Employees of community banks are also likely to be members of the community themselves–so they tend to be better equipped to understand the specific needs of the families and businesses they serve.

Many small businesses also choose to work with community banks because they prefer to put their dollars toward the local economy. Because their scope of lending is small and localized, community banks funnel capital back into the communities they serve—which is especially important in underserved areas.

The Drawbacks of Working with Community Banks

There’s no denying that community banks were hit hard by the financial regulations implemented after the 2008 crisis. In fact, the number of community banks in the U.S. dropped 25% between the heart of the financial crisis in 2008 and 2016.[3] Besides their smaller numbers, community banks have other drawbacks you need to consider as well.

1. No Safety Net

Because big banks have economies of scale, it’s easier for them to withstand changes in regulatory policy and the broader economy. Since community banks take on higher compliance and overhead costs relative to their size, they’re more vulnerable to those types of changes—making it riskier to do business with them.

2. Limited Reach

Small community banks are less likely than large commercial banks to have branches in multiple cities, which can be inconvenient for business owners with several locations. Although some banks mitigate this downside by reimbursing for ATM withdrawal fees out of state, it’s important to consider the ease of doing business when choosing your bank.

Community banks also tend to underinvest in digital tools, which eliminates many of the conveniences of online banking. In many cases, that means they don’t provide online access to business checking accounts or the ability to link business credit cards with debit cards.  

Looking Ahead at Community Banks and Small Business

Regardless of what happens to community banks as a result of changing regulations, they’re a great option for many small businesses seeking personalized attention—or who want to give back to their communities. But they might not be the best solution for business owners who prioritize convenience and accessibility.

Now more than ever, small business owners have a ton of choices when it comes to business financing. In addition to community banks and large banks, small business owners can also look to online banking services. Online banks like Ally and EverBank offer online checking accounts for no fee and boast the convenience of paying bills, making deposits, and transferring funds instantly, and they’ll probably become more prominent players in the years to come.

If you do choose to work with a community bank, you aren’t limited to offline options!

You can always work simultaneously with online lenders or marketplaces to search for credit as well.

Article Sources:

  1. “Small Biz Lending Approval Rates Surge at Big Banks, Institutional Investors: Biz2Credit Small Business Lending Index
  2. “The State of Small Business Lending
  3. “The Recent Decline in the Number of Banks
Former Communications Manager at Fundera

Shira Almeleh

Shira was the Communications Manager at Fundera. She works with members of the media, bloggers, and organizations to spread the word about Fundera and help educate small business owners about their financing options.

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