Finding the right bank to start up a business has always been a big problem, especially for most entrepreneurs and small business owners who turn to their primary bank when seeking a bank loan. This is not always the right course of action.
Categories of banks for Small business startup
There are several different categories of banks, and some are more attuned to the credit needs of the small-business customer than others. Banking analysts divide banks into four major categories:
But which bank is the best choice for your small business startup?
Money-center banks and super-regional banks are the largest banks in the banking system. They have their headquarters in major financial centers, such as New York, Charlotte, North Carolina and Chicago. They operate in multiple states.
Regional banks typically operate in one or a few adjacent states. They are large but much smaller than the money-center or super-regional banks. Community banks operate in one city or town or a particular region of a state.
The customers of money-center and super-regional banks include major U.S. and multinational corporations and extremely wealthy individuals. These relationships run into many millions of dollars each. In addition, these banks serve the ordinary consumer with a range of consumer-banking products, such as credit cards, whose profitability depends on large-scale operations. The largest banks also may have small-business banking services. You may be familiar with a large bank because you have your personal banking relationship there.
Relationship with the large bank for business startup
Because of the large size and bureaucracy of a large bank, however, it may be difficult for the small business to have a satisfactory relationship with the large bank. This is particularly true if the small business seeks a loan. To get the advantages of scale, many large banks have a highly structured approach to small-business lending that makes it difficult for them to tailor arrangements to special situations. One solution they may offer is a business credit card, which is usually characterized by high rates.
Regional banks for business startup
Regional banks typically do not have the lead banking relationship with major corporations or the economies of scale for mass consumer banking. Regional banks therefore pay more attention to small-business customers. Many small businesses find that regional banks are an attractive solution to their banking needs. They can provide specialized services, such as cash management and international banking, but are small enough to offer you more personalized service.
Community banks for small business startup
The customers of community banks are primarily small businesses and consumers in the community. Therefore, community banks are a good source of small-business loans. Federal Reserve statistics show that community banks hold a disproportionate share of small business loans.
Though community banks only account for 15 percent of the banking system’s assets and 19 percent of its deposits, they hold 23 percent of small-business loans and 36 percent of small-business loans under $100,000. The entrepreneur or small-business owner will frequently find the community bank is the best source of the personal attention they seek. Terms and conditions will be competitive. If the interest rate is slightly higher, it can be offset by the individual attention given to the business’s requirements.
KEY POINT: Not all banks are equally comfortable with all prospective customers. Lending officers may have had good or bad experience with certain small business segments in the past. They may be more familiar with certain types of businesses than with others. It is therefore wise for you to interview several banks to select the one that appears most responsive in dealing with your company’s requirements.