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What Makes The Community Banks So Valuable

By Bizbox

We've been hearing for over a month now how the community banks are going to be among small business' lenders of last resort. The good news here is that these small (under $1 billion in assets), locally-focused institutions tend to be financially healthy, even now; the bad news is that the $700 billion bailout is putting them in the awkward position of either taking money they don't need (but would open them up to the perception of being in a weak position) or of being put at a capital disadvantage to competitors that did take the money. We've said that we are going to keep on eye on how the community banks are faring, both because they frequently are themselves small businesses--small businesses in the all-important financial industry--and they are in turn so crucial to the prospects of small businesses in other industries due to their ability to provide credit.

One point that the Anonymous Big Banker whom the New York Times quoted a couple weeks ago arguing for the federal government to give more help to small banks made is that the small banks know small businesses' actual prospects: they're not just looking blindly at a bunch of impersonal credit scores; they are taking the time to take in the whole package. A wonderful article in Tuesday's Wall Street Journal makes the same point: perfectly deserving, credit-worthy small businesses who are getting turned down for loans right now by big banks that don't know them have found themselves going to community banks and related credit unions for cash.

The idea is that the local institutions are familiar with how a small business fits into its community, the niche it has carved out, and therefore its prospects for making good on a loan. So a Mexican restaurant in California with a perfectly good credit score was turned down by numerous big banks that, basically, are very skeptical right now of lending to small businesses in the food industry (which is facing skyrocketing prices due to the costs of both food and energy as well as slumping consumer discretionary spending power). A local credit union, however, was happy to lend it close to $650,000 since it has a better sense of the advantages this particular restaurant possesses (such as its strategic location in a bedroom community where people are more open to going out to restaurants close to them).

The ordinary metrics are not unimporant to the local institutions. Credit score is still important (here's how to improve yours!). Cash flow is even more important, apparently.

But still, "Often times," to quote one observer, "the larger institutions will rely more heavily on the credit score, whereas sometimes community banks will take a much closer look at the business plan. And especially if they are based in the region or the community, they will make a decision based on their overall comfort with the business plan and presentation." The quoted observer being Sandy Baruah, the acting administrator of the Small Business Administration.

Anyway, bottom line: if you need any further persuasion of the merits of the government finding some way beyond the $700 billion plan to help the small banks, than read the article.

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