Small Banks Really Want Your Business

As The New York Times recently observed, "The recession has provided an opening for small banks to promote their relative stability ... and most smaller banks have continued to extend credit to consumers and small businesses, while big banks like Citigroup continue to cut back on their outstanding loan balances. With the bankruptcy of the CIT Group, one of the biggest small-business lenders in the country, community banks sense even more opportunity to fill the void."

Great news -- but harder than it looks, as any entrepreneur who has gone to a smaller bank for a loan and come away empty-handed knows. So we put the word out to some smaller banks and credit unions, asked for some advice for getting a loan from them, and here's some of the insight that came back to us.

Don't be afraid to get personal. That advice comes from Gilles Gade, the chairman of the Cross River Bank in Teaneck, New Jersey. He stresses that working with a community bank means "you have the opportunity to deal with a lender who is an actual person." Community bankers obviously want the business details, but they all swear that getting a sense of who they're loaning to is of paramount importance.

Gade also recommends that if you have any "financial skeletons in the closet," you should come clean. "Bring them up before your community banker discovers them, which they very likely will," advises Gade.

Look for an angle and try to find a bank that corresponds with that angle. What do we mean? Well, Umpqua Bank, a community bank servicing in Oregon, southwest Washington and Northern California, has an eco-banking division. So if your company is located in their area, and you have environmental needs that would help your business and fulfill their mandate to help businesses with renewable energy projects -- obviously you've probably got a perfect match. For instance, spokesperson Jamie Godfrey says that when George Hansen, a beekeeper and owner of Oregon-based Foothills Honey Co., wanted to install solar panels on his farm, to help him reduce his energy costs, they were able to help him get more than $50,000 in business energy tax credits and $30,000 in federal tax write-offs.

If your credit union or small bank can't offer a loan, ask if they can team up with another financial institution. Sounds crazy, at first, until John Boit, a spokesman for Germantown, Maryland's Mid-Atlantic Federal Credit Union (MAFCU), explains it.

"Credit unions have to limit the amount of business loans they give out with a ceiling at 12.25% of their assets," says Boit. "Banks, on the other hand, can loan out up to 20 percent or more of their assets. Smart credit unions like MAFCU are figuring out how to increase their business loans without hitting their loan cap," says Boit. "MACFU established an entity called Mid-Atlantic Financial Partners, and has found a real niche in making itself the back office for local credit unions to make business loans."

Boit says if the loan is less than $50,000, it doesn't count against the credit union's total loan cap, and with larger loans, "only the non-guaranteed part of the loan counts against the cap. So if a credit union makes a $1 million loan with $900,000 guaranteed by the SBA, then only the remaining $100,000 counts against the loan cap. The problem is that in order to get that government loan guarantee, a credit union has to structure the loan according to regulations contained in a set of regulations that is about eight inches thick. Most credit unions don't want the hassle."

So what Boit is saying is that if your credit union doesn't specialize in SBA-backed loans, you could ask them to partner up with one that does, whether it's MACFU or somewhere else, of course. Or you may have another reason to ask your credit union or small bank to partner up with another like-minded credit union or bank. "Mid-Atlantic Financial Partners sees this as the future of credit unions," says Boit. "Credit unions, as nonprofit entities, are also far more likely to band together and cooperate on doing business together, rather than big banks that compete against one another."

Don't shortchange yourself by shortchanging the banker of every scrap of information you can give them. Gade of the Cross River Bank points out that "many large lenders tend to avoid certain industries -- particularly those they don't understand. Conversely, community bankers are often more open to funding companies in a variety of industry segments."

That said, Gade stresses that, particularly if you seek to own a niche, relatively obscure market, you need to provide "ample detail in the market analysis section of your business plan. Help your community truly understand the market you're pursuing -- along with its particular nuances, challenges and opportunities. The more you 'educate' your community banker, the more you showcase your knowledge of the market segment and demonstrate your ability to successfully penetrate it with your product or service."