Why Do Small Banks Make More Small Business Loans?

Community banks are the traditional leaders of small-business lending. They approve more small loans than their national counterparts and generate higher satisfaction rates among small business borrowers. Why? The answer is simple, tried, and true: These local institutions provide a vital combination of personal service and regional know-how that is a boon to local industry. Additionally, the small scope of their reach allows these banks to play by rules that favor non-traditional loan-seekers and smaller but riskier investments. This is how small banks became the backbone of Main Street America.

More than just a lender

Small banks pride themselves on going above and beyond in their relations with customers. They can be both an advisor and a friend to local businesses, and the bonds between community lenders and area industries inspire loyalty that often lasts for decades. It is harder for large banks to establish such networks for many reasons, including disconnect with the region, a longer client list, more employees, and others. Perhaps most importantly, they can never understand a small business the way a local bank can. As hometown institutions, small banks are cousins to the customers they serve.

Bastions of regional expertise

The loan officers working at community banks typically have deep familiarity with the area they serve. They are acutely aware that their hometown needs local enterprises to ensure a healthy economy. Knowledge of the region’s market not only attracts business owners to small banks, but it also helps guarantee their loan approval. Small banks use their local wisdom to guide judgment about which firms will be valuable to a community, as well as what those businesses will need in order to thrive. Overall, small banks’ know-how in regards to local economic activity is great news for small business owners.

The benefit of flexible policies

Big banks often have to turn away small business owners looking for funds because of the strict approval processes they must follow. Fortunately, creditworthy applicants can more easily turn to local institutions for financial assistance. Community banks have different lending practices that can often rely much more on qualitative analysis. While they do run numbers, their assessments generally go much further, factoring in things like a borrower’s character and the town’s commercial needs. Large organizations do not have the luxury of reviewing applicants on this basis, and instead use a standardized quantitative approach.

For this reason and those above, small businesses need their friends at community banks, much in the way that community banks need small businesses. The ability of small banks to finance such ventures is what has made the top small business loan providers titans of local industry — and they can offer your business the same assistance.