Over the past few years, data has shown that small businesses are more likely to receive financing and loans from small, community banks than online financers or large banks. The Fed’s Small Business Credit Survey released in March 2023 reinforced this viewpoint, recommending that small businesses form relationships with and secure funding from local banks.
Small banks are defined as those with less than $10 billion in total assets. These small banks, or community banks, make up the majority of banks in the United States. While small businesses are often motivated to apply for financing from an online provider because of the speed of approval and what they perceive to be a lottery system for who is approved, this is no longer the case. Before the COVID-19 pandemic, this strategy was valid, but it is becoming clear that forming relationships with local community banks is the fastest and easiest way for a small business to acquire a loan.
Community banks employ locals who are intimately familiar with the area and its economy. These decision-makers understand better than anyone which businesses will succeed in their community. They know the people in their area, the local business owners, and what their community is lacking that a new business could provide. During the pandemic, when the future was uncertain and banks were being more careful with loans and financing than ever before, local communities grew closer, and forming relationships with local businesses became extremely important. Looking at the data, this is when small banks became the better option for small businesses hoping to secure financing.
According to the Fed’s survey, more than 80% of small businesses that applied for financing at community banks were at least partially approved in 2022. Whereas these investments are considered high-risk at larger banks, at small banks where the locals know each other and what businesses will work for the community, these investments are less risky. 3 in 5 applicants considered to be a medium or high credit risk were approved for financing at small banks, while not even half of these riskier applicants were approved by large banks. 2 in 3 small businesses that applied for financing at small banks did so because of an existing relationship with the bank or someone at the bank. The data shows that online financers still approve these riskier loans at a slightly higher rate, but customers reported high levels of dissatisfaction with their experiences. By contrast, the vast majority of small business owners who borrowed from small banks were happy with their arrangements.
The survey reported that 2 in 5 small businesses applied for some kind of traditional financing in 2022 to cover operating expenses or expand their operations. Small businesses make up nearly all of the businesses in the United States, creating a competitive market for new companies and securing loans. With such high numbers of businesses applying for loans, small business owners need to know where they have the best chance of getting approved for financing. Instead of wasting time with big banks, getting friendly with community leaders and appealing to small banks seems like the way to go.
