In 2000, Ronald Reed launched his home health-care equipment company, Benchmark Mobility Inc., with just $1,800. But his capital needs accelerated so quickly that within a few years, his personal savings, credit cards and home-equity funds were no longer up to the task. "I was sitting on a couple hundred thousand dollars of business I couldn't do anything with because I had outgrown my personal credit," says Reed, 36.

But securing growth capital wouldn't be easy. Reed worked his way through the Yellow Pages, but was turned down by every large bank he contacted. Their concern was universal: his lack of assets to secure the loan. "For us to have $3 million in sales, we might only have $50,000 of inventory at any given time," Reed reveals. "Now that's a huge gap, and most banks aren't comfortable [granting] a quarter-million-dollar credit line without having a building and a large amount of inventory to substantiate that. Even though the company is making a great deal of money and cash flow is pretty well-diversified through different payers, the banks don't see us as their ideal client."

Two years and 21 banks later, the Indianapolis entrepreneur still didn't have financing. In the meantime, his financial situation had grown progressively worse. "There were times I wasn't sure I was going to make payroll," he recalls. Frustrated, he asked the Central Indiana Small Business Development Center for help. One of the smaller banks it recommended came through with a $250,000 line of credit. "That's a bank I never would have considered," Reed admits. "I assumed a bigger bank would have more money to take chances on [small companies] vs. a smaller bank that I assumed would have to have fewer loans that are risky. But it was the opposite--we had to go to a small bank strictly because they were the only ones willing to listen."

David vs. Goliath

It seems like every bank today calls itself a small-business lender and promises specialized attention and loans to support a wide range of commercial needs. But there are important distinctions in the way banks of different sizes approach small-business lending, as Reed's credit search illustrates. For starters, small lenders are less driven by financial formulas and more inclined to consider individual factors, such as the business's management, in making their loan decisions. Their lending styles appeal to borrowers weary of the widespread consolidation that has created increasingly larger banks and, many argue, cookie-cutter service.

Loan decisions at large banks, meanwhile, are rarely made locally. Financing applications are sent off to the bank headquarters for analysis, and the decision is ultimately based on the applicant's computerized credit score, not the judgment of local loan officers. By virtue of size, however, the largest lenders have sophisticated credit products to support an entrepreneur's evolving financing needs, such things as loans for international trade. Some even have VC units.

Each banking group clearly has distinct advantages. For business borrowers, it often boils down to a choice between the big-bank credit arsenal and the personal service of a community lender. "A more sophisticated loan plan or investment plan is something you look to the larger institutions to do," says James Ballentine, director of community and economic development for the American Bankers Association. "But a community institution says, 'We can provide you with greater customer service because we know the area that you're in and have historical knowledge of this community.'"

In truth, many fledgling entrepreneurs turn to smaller lenders out of necessity. "You have small businesses that are in different stages of their lives. The newer firms that don't have long histories of audited financials or histories of paying their suppliers on a regular basis really need that experienced community lender who doesn't rely on the standard financial ratios to make credit decisions," explains Jonathan Scott, associate professor of finance at Temple University's Richard J. Fox School of Business in Philadelphia. "[The answer] may not always be yes, but at least it's not a matter of, 'We'll type this data into the computer and we'll get our decision.'"

While community banks can provide flexibility, they may, however, have a difficult time keeping pace with the financing needs of their business borrowers. What's more, some small banks lack the in-house expertise to offer government-guaranteed financing, such as SBA loans. Although most community banks are at least familiar with SBA loans, many cannot provide the quick turnaround of larger, more practiced lenders. Says Gina Woods, business advisor at the Central Indiana Small Business Development Center, "What's so nice about going to a [large bank] is that they do SBA loans all the time."

Credit Culture

Access to the right kind of credit is just one factor in choosing a bank. Equally important is the bank's credit culture, or the policies and principles that direct lending activity. For instance, many large banks focus on businesses of a certain size, meaning that if your company falls outside those parameters, you probably won't get the same level of service as a larger, more valued customer. That isn't as much of a problem at a smaller bank. "The big advantage is that I have access to executive management, and executive management has been receptive when I have had a potential opportunity," Reed says of his bank.

And of course, there is the issue of underwriting flexibility. While banking industry insiders say that increased competition has forced large banks to become more flexible, "community banks, if they know a community well, are perhaps more willing to deviate from [their lending] formulas," says Ballentine.

Nonetheless, there are very different approaches, even among community banks. "Some community banks are more specialized in real estate lending," Scott stresses. "Others want a balance between real estate and small-business lending." And while community banks often champion entrepreneurial ventures shunned by large lenders, some are more risk-averse than others. Scott witnessed this firsthand when he referred a hair salon owner to a local community bank for financing. The businesswoman wanted to move to a new commercial location, a historic building that presented some zoning challenges. Scott's recommended bank passed on the credit request. "They were somewhat conservative," he says. The business owner pitched the loan deal to another community bank, one that was less concerned about the zoning issues. It ultimately approved financing.

While a bank's size does influence its commercial lending culture, as Scott's example illustrates, it doesn't tell the whole story. "You need to shop around to find out what bank fits your needs," Ballentine urges. "It's good to go to both large and small institutions to see the kinds of services they are providing."


Crystal Detamore-Rodman is a Charlottesville, Virginia, writer who covers the small-business finance market.