For years, the conventional wisdom was that small, community-based banks were good places for entrepreneurs to do their banking. It was easier to build a relationship with a local loan officer who lived in -- and cared about -- your town, rather than trying to convince a far-off national bank headquarters to lend you money.
There's only one problem: Small banks are disappearing.
What some may have hoped was a momentary, recession-fueled blip in smaller banks going bust appears to instead be an ongoing trend. And it's a trend that doesn't bode well for small-business owners hoping a community bank might give them a better shake than the big national banking chains.
A recently released study by financial-services research firm Celent charts the decline of community banking. We've lost nearly 6,000 banks with under $100 million in assets since 1992, a 43 percent drop, according to the Celent study, It Takes More Than a Village Redux: The Decline of the Community Bank.
At the same time, assets have concentrated mightily in the hands of the top five largest banks. These banks held 11 percent of America's deposits in 1995, while today that's shot up to 35 percent.
Banking is more competitive and complex today, Celent says, with the result that the smaller the bank, the harder it is for that bank to compete and the more likely it is to expire. More than 460 banks with assets under $100 million have folded since 2008, while only 27 folded with assets from $100 million to $300 million. The study forecasts the next category to see a wave of closures will be banks with assets between $300 million and $500 million.
What's this mean for small business owners? There will be fewer bigger banks and less choice in where you might go to get a business loan.
That means you need a sterling credit score and solid financials. Community bankers might sometimes loan based more on your story and reputation in your town. In the future, it'll be much more about the numbers.
It may also mean more entrepreneurs will turn to alternative financing -- microlenders such as Accion USA, peer loan sites such as Prosper.com or donation sites such as KickStarter, for example. Probably also more "alternative finance" such as selling receivables, getting merchant finance or borrowing from family and friends.
Huffington Post founder Arianna Huffington started a campaign in 2009 urging citizens to move their money out of chain banks and to independents, in hopes of better distributing power in the banking sector and preventing future federal bailouts for "too big to fail" financial institutions. It doesn't seem to be working.
The question is, will the concentration of power at fewer and fewer banks hurt your business, or help it?
Where does your business bank, and why? Leave a comment and tell us whether community banks are important to your business.
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Comments:
We have this problem as well. We have two banks. A big national to do our international wire receipts, and a community bank to handle demand deposit.
Our small furniture restoration firm has jumped from one local financial institution to another as big banks gobble them up. As local banks disappear, local firms lose more than a source of loans - we lose in smaller but no less significant ways. Often, without notice, over-draft plans disappear, and bank policies concerning access to deposited funds become untenable. These are not insignificant issues. Small firms lose control of their cash flows, while big banks put the difference into their own cash flows. Sad.
We are a small high growth company (20 employees), information services firm, doubling revenue Y to Y, with over 40% of our revenue coming from overseas. We actually prefer to deal with national banks. We have found our local banks to be overly conservative, with a myopic focus on funding real estate (in this economy?) and brick and mortar manufacturing businesses. They have difficulty dealing with international business and are essentially focused on funding traditional local firms. Basically, they are stuck in a 60's business model when we are a 2000's economy business! So for us, local banks are not of any real help.
I've always been an advocate of community banking and credit unions. If you recall neither one of those were in trouble and needed a bailout when the real estate bubble burst. Small banks won't take the insane risks those big national banks did, because they know when they fail there is no bailout. Americans need to wake up. They complain about big businesses and corporations, then continue to give them their money. Vote with your dollars, no company should be "too big to fail".
Here in Vegas, http://www.bankownedproperties.org/bankhomes/NEVADA/CLARK/LAS%20VEGAS.html , it's getting tougher to get a loan with those new rules. And everybody is afraid of losing their houses due to an unsuccessful deal.
If everyone left the banks and went with a community bank or credit union, we wouldn't see so many going out of business. We all need to look at what banks are doing for small business and make the shift to community based banking. It's a reciprocal relationship.
I sometimes am glad I am not a USA citizen but allow me to add a comment to your very interesting topic. I have listened to Arianna Huffington on CNN many times and I really must say that hers is wisdom not common today. Cannot anyone encourage her to keep pushing?
I think we can still count on community banks, we just have to be more careful with it and make sure that their services are guaranteed.
There is an effort in Oregon to create a state bank to aggregate the state's economic development funds into one pot and boost small business and agriculture lending through community banks. Since 2007 both of these areas have all but dried up. The future of our local communities and Main Street rely on boosting the community banking sector as Wall Street banks have proven they have no desire to do what banks were invented to do: pool the community's resources to lend to people to buy crops or start a business. For more information about a state bank visit http://oregoniansforastatebank.org/ or http://www.mainstreetalliance.org
Yea in my area small community banks have closed. However, another great source for small businesses would be credit unions. They are also willing to work with small businesses.
Thanks for sharing such a valuable information. I have depended on community banks too when I started my business. Luckily my business had persisted. I hope entrepreneurs don't get discouraged by these facts but will make this a challenge for them to pursue their business.
Folks, it has been a long time coming but the inevitable has finally been called what it is. Ms Rice has more than accurately reported the major cause's of so many of us having cash flow problems; the consolidation of the banking industry and the very ugly, and therefore not publisized fact, that the bank's are sitting on our, and our customer's, cash, credit and capital. And they are doing so simply to both look good to their respective Board of Directors and institutional stockholder's as well as keep their corporate balance sheets fat for their year-end report. That they are also doing this to look good for their 1st Dodd-Frank look-see is also another not so coincidental fact as well. This current banking attitude has all the earmark's of another 1929 crash. The problem then, and as it is rapidly shaping up now, is not the lack of cash, credit or capital. It's the fact that the bank's are literally sitting on all of it and not letting it circulate. Money, in whatever form, is a working commodity. Commodity's need to circulate to have any real value. Should either Congress or the Senate ever decide to start looking, and I mean a with an IRS auditor-type's Monday morning hangover attitude, and find not only where the money is but why it isin't being circulated, well, having one's Federal or State Banking Charter put under review, which is a mandated public record, is going to be a not so subtle way of telling the business community that their partcular bank is now going to be subject to additional oversight and being placed on a Federal Reserve Watch List. Banker's, think of what that little declaration is gonna do to your bank's position. Not to mention what it's gonna lead to at the next Board of Director's meeting or the Annual Stockholder's vote. The Dorian Gray Syndrome is far closer than you think. Not to slam Ms. Rice but I would be seriously interested in seeing how the credit union's are responding to this cash hoarding and community bank 'consolidation' trend. If there was ever a time when 'alternative financing', such as a community based credit union, was needed, or at least looked at as an option, workable or not, now would seem to be a pretty good time to do so. The same could be said of the various State Small Business Development Fund's and Development Bank's. Whether anyone likes him or not, Obama has made the case repeatedly. Small business's drive the economy. And small business's can not start-up, much less remain in business, without access to working capital or the credit market's. And, as if it needs reiterating, if and when it comes down to it, the small business community has to start taking their cash reserves out of the bank's to fund operations anddevelopment, what cash is there left to circulate ? Folk's, 1929 is far closer than anyone thinks. And all it takes to cure it is for the bank's to get a good swift kick in the butt from the Federal Reserve's and the FDIC. Having one's FDIC premium jack'ed up always get's a bank's Comptrollers attention real quick.
Quite revealing figures. Hopefully community banks are back!
Have you tried a Credit Union
A bank with less than $100 million in assets is minute, not small. Of course they are not hanging in there since they have no depth of staff and massive regulation. The well-capitalized banks in the $200 million to $1 billion size (those with 4-12 branches, not 1) are still churning away and providing much-needed capital. Ed Fitzgerald Commercial VP The Savings Bank - Wakefield MA.
Until ANY bank starts allocating money to small businesses neither small banks or large banks are any help. Try getting a line of credit even when you've previously had one with your existing bank. Banks are not lending money to help the small business do business. Too many companies are going out of business because they can't get the credit to buy materials for jobs they have. Businesses such are ours have to use a credit card to purchase materials and wait for subs to pay us so I can pay my credit card. Up until a year and half ago, we had a line of credit to work with. Our bank took that away-along with other banks we looked into not even offering them. Luckily we're still in business but with no help from a large or small bank. michele contractors wife