The Bank in Your Backyard

Building strong connections with community banks can pay off during uncertain economic times.

Marilyn O'Neill's company needed money. Nautilus Environmental, the San Diego environmental consulting firm she launched in 2004, had grown quickly. But to continue growing, O'Neill needed about three-quarters of a million bucks--smack in the middle of a recession and on the heels of her company losing about $170,000 during the downturn.

At the same time, the bank she had used since 2006--and the one that held her $550,000 line of credit--increased its loan audits from once a year to four times a year. "I didn't think we should have to do that," she says. "Then the CEO was fired by the board, and it started looking like things were unstable."

So O'Neill began looking to other banks, large and small, in search of funding. Over the course of a year, she talked with about 10 of them, but one community bank in particular, Security Business Bank of San Diego, took an interest in her company. The manager eagerly courted Nautilus and seemed to understand the business.

"He was working so much harder on making this happen than my current bank was," she says. "He kept coming back to me, saying, 'OK, we have these losses in 2009. Help me understand them so I can explain them in a way that gets us through the process.'"

In March, O'Neill closed a $709,000 Small Business Administration loan with Security Business Bank. The money paid off the $498,000 balance on her existing line of credit and gave her about $200,000 to shore up her cash reserves.

Yes, it took a year for her to get to that point, but that kind of due diligence is exactly what independent business owners need to practice when choosing a financial partner, says Richard Barrington, personal finance expert at, a financial information site that compares interest rates of various products. Choosing the right banking partner means looking far beyond great rates and convenient hours, especially in recessionary times.

First, some good news: Activity in loans backed by the Small Business Administration and other commercial lenders showed signs of renewal in the first quarter of the year, partly the result of more than $1 billion in loan guarantees from the American Recovery and Reinvestment Act. And there have been additional proposals to loosen lending to small businesses. In February, the White House announced plans for the Small Business Lending Fund, which would transfer $30 billion from the Troubled Asset Relief Program (TARP). Now, the fund needs to wind its way through the legislative process.

Meanwhile, small businesses still need to find money. Conventional wisdom says it's better to be a big fish in a small pond, but larger banks may offer more experience in and access to international services or a greater variety of financial products and services, says financial advisor Bruce Fenton, managing director of Atlantic Financial, an investment firm in Norwell, Mass. Some may be able to provide easier access to ancillary business lines in insurance or investing services.

However, the sheer size of many large banks makes it difficult for even midsize companies to have much influence.

That was Julie Parrish's gut instinct. Parrish and Heidi Kennedy are co-founders of Coupon Girls. Last year they shelled out nearly $40,000 to successfully defend their website,, against an allegation of trademark infringement. Parrish and Kennedy knew they needed a line of credit but were afraid that their primary bank, Wells Fargo, wouldn't look too benevolently upon them. Coupon Girls is a fledgling business whose owners found each other online seven years ago and have never met in person--Parrish lives in West-Linn, Ore., and Kennedy lives in Gillette, Wyo. Their credit scores were "in the low 700s," says Parrish. And before Parrish's husband was deployed to Iraq last year, the couple took out $150,000 in loans to renovate their 1977 home, and she racked up $20,000 in student loans obtaining her master's degree in business administration.

"We made some choices, with three kids, that if something should happen to him, the house is secure and I have the skills to support the kids," she says.

So Parrish went into her local bank hoping to borrow money to help pay her attorneys, and within a few days they secured a $40,000 line of credit. Parrish says the bank's manager pushed for the line because he believed in their business.

"There are three reasons why a small business would tend to favor borrowing from a community bank," Barrington says. "One is cultural fit. Another is lower overhead. And, a third, is useful interest in the community."

Barlow Research, a Minneapolis banking market research firm, finds that 73 percent of small businesses that bank with small banks consider themselves "very satisfied" vs. 50 percent of large-bank customers. Large banks are defined as those with $50 billion-plus in assets; medium banks are those with $1 billion to $50 billion in assets; and small banks have less than $1 billion in assets.

Small-business lending plans are on the rise among smaller-bank customers, too, says Linda O'Connell, managing director of small-business banking for Barlow. Sixty-eight percent of small-bank, small-business customers plan to borrow at their primary bank in the next year, compared with about one-third the year before. Sixty-one percent of medium-bank customers and 51 percent of large-bank customers plan to seek loans.

Regardless of the size of the bank, however, you should make decisions based on how eager the institution is to get your business.

"Don't limit yourself to one size of bank," Barrington says. "After all, community banks only represent 23 percent of the industry by assets, but they represent 97 percent of all banks by number of banks."

Choosing the best banking partner requires research and negotiation. First, Fenton says, find a bank with a strong manager with whom you'll be able to build a relationship. The relationship has always been important, the financial advisor says, but it has been tougher to cultivate in recent years because mergers and acquisitions have created more mega-banks.

Robert C. Seiwert, senior vice president with the American Bankers Association, suggests meeting with your bank representative and asking what kind of experience he or she has with businesses like yours. Your banker should have some expertise in your industry so that he or she understands the business and can help bring solutions to your firm. Make sure that the bank is capable of handling special needs, such as letters of credit or other tools for international transactions. Also, ask if you'll have access to other advisors in the bank--if you have a problem, will the bank provide all of its resources to help you find solutions?

Once you're satisfied with the people portion of the decision, look at the bank's stability. The FDIC Bank Data section of its website ( includes information on bank health markers such as assets and liabilities. In addition,'s "Safe and Sound" rating system measures the capital adequacy, asset quality, profitability and liquidity of banks and credit unions by using more than 20 tests and rates each bank on a five-star scale. This is important because if a bank fails, FDIC-insured accounts are protected up to $250,000, but loans and lines of credit have no such guarantees and may be frozen or come due.

If you're looking for a loan from your bank, don't shop just by rate, Seiwert warns: "There's nothing more costly to a small business than the wrong loan at a great price."

A bank that demands more collateral than is necessary or reasonable can hurt your business, no matter how low an interest rate you get. Pledging too much collateral limits your options to borrow again when you need it for growth or other reasons. Terms and interest rates are often negotiable, especially at smaller banks, where the chain of command to the ultimate decision-maker is shorter. If you need a loan in a short period of time and the bank you're talking to has a minimum of a two-month turnaround, you need to keep looking, Barrington says. Your local Small Business Development Center can provide a list of SBA preferred lenders who often deal with small businesses.

Besides building a relationship with your banker, keep your options open to best serve your business. Parrish and Kennedy still have an account with Wells Fargo in case they ever need to tap the muscle of a bigger bank. In fact, one of their web developers is a Wells Fargo client, so they deposit their payments to him directly into his Wells Fargo account so that they clear more quickly, which helps the pair manage their cash flow.

Like anything else, the more research you do upfront about your prospective bank, the better decision you'll be able to make, making it more likely you will find a long-term home for your business's financial needs. That's the experience Nautilus Environmental's O'Neill had with her community banker.

"Going through the process made me feel that as we go forward with our plans to invest," she says, "he would be there in the same way to support me and help me."

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Gwen Moran is a freelance writer and co-author of The Complete Idiot's Guide to Business Plans (Alpha, 2010).

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This article was originally published in the July 2010 print edition of Entrepreneur with the headline: The Bank in Your Backyard.

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