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How to find the best community bank lender for your small business

Developing a long-term relationship with your local banker can be a great investment for your business.

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Two small business owners meeting with a local banker.

Community banks offer more than just financing. Your banker can also connect you with a suite of services to assist in the efficiency of your business. And even provide information that could help you understand the strengths and weaknesses of your business strategy.

Ideally, you’re signing up for a long-term relationship when you take out a loan. So you should look for a banker who's familiar with your industry and can give your application — and your business — the attention it deserves.

6 expert tips to choose the right local bank

Choosing a bank isn’t just about comparing costs. You’ll also have to consider the type of relationship you’re going to have with this provider — and how else you can benefit.

1. Think of it as a supplier.

A bank is like any other supplier — but instead of providing inventory or raw materials, it provides financing and other services. Look at factors like the quality of the service, speed and reliability.

If you have a tried and true strategy for vetting other companies, consider applying it to your search for a local bank loan.

2. Get a sense of the customer experience.

You can sometimes get a general idea of what it would be like working with a local bank by customer reviews online. Also, reach out to your network of local business owners — including competitors, suppliers and clients. Ask if anyone has used that bank and if so, what their experience was like.

If there are hundreds of mostly negative reviews or someone you trust had a bad experience, those could be red flags. Scheduling a meeting with a banker in person or over the phone before you decide to use them can also give you a sense of who you’ll be working with and how they'll treat you.

3. Compare activity fees.

Interest rates are only one of the many costs you’ll pay at a bank. If you become a client, chances are you’ll use other banking services that come with fees, like a checking account, remote deposit or ACH transfer fees.

Interest rates can vary, and may be hard to nail down before you apply for the loan. But fees are often the same for all customers, and can be available online. This makes it easier to get an apples-to-apples comparison between the cost of working with different banks.

4. Look for expertise.

When meeting with a banker, ask if they have experience working with your industry or any competitors. If they do, this can be hugely beneficial to your business. They’ll have an understanding of what does and doesn’t work in terms of financing — and even running your business. And they'll be better prepared to anticipate when you’ll need financing in the future.

If they only show limited interest in working with you during the prospect meeting, you'll likely get much less out of the banking relationship than you had anticipated.

5. Look for attention to your business.

Ask how long it will take to get a business loan during your meeting. A banker who's eager to give you a loan fast might not be working in your best interest.

Legally, banks can take as long 30 days to give you an answer after receiving an application. Since you’re a new client, a turnaround closer to a month can actually be a good sign. It shows they’re taking the time to structure your loan properly and thoroughly vet your application.

6. Look into all the services the bank has to offer commercial clients.

Consider the other services the bank offers that your business might benefit from now or in the future. Some local banks have relationship discounts on certain products — and keeping everything in one place can make it easier to manage your business’s finances.

Can my business qualify for a community bank loan?

Almost all established businesses can find a community bank loan if they look hard enough. But to qualify with a bank that’s working in your business’s best interest, you generally need to meet the following criteria:

  • Profitable business. Your business should already be turning a profit on an annual and interim basis. Community banks generally don’t provide startup funding.
  • Enough cash flow to support repayments. Your business should generate enough income and cash flow to cover the new loan payments as well as any existing debt payments.
  • Sufficient return on investment (ROI). A loan should be an investment in the future of your business. The project or asset you’re funding should also have a high enough rate of return to cover loan repayments. Figure out what the ROI is before you reach out to a bank.
  • Cash reserves. In addition to cash flow, your business should have enough equity to prove sufficient to survive a period of stress before you start working with a community bank.
  • Skin in the game. Investing your assets or earnings back into the business shows that you’re willing to take the same risks you’re asking the bank to take.
  • Strong character. Your trustworthiness as a business owner counts for a lot. So, for example, if you’ve understated your assets to pay less in taxes, you won’t be able to borrow as much — if the bank is even willing to work with you at all.

5 steps to take before applying

Taking these steps before you start shopping around for a community bank loan can strengthen your position when you apply.

  1. Review your financial statements. Make sure your business’s financial statements are up to date and accurate so that the bank can make an accurate assessment of what your business really needs.
  2. Pay off debts — or build equity. Your business should have a debt to tangible net worth ratio of 3.5 or lower. You can lower this ratio by paying off business debts or increasing your equity investment in the company.
  3. Know exactly what the funding is for. Do you need inventory to meet an uptick in demand? Is your equipment out of date? Going in with this information can speed up the application process.
  4. Have documents and information ready. Ask what you need to bring before you have your first meeting to help them quickly give you an idea of what you might qualify for.
  5. Shop around. Don’t settle for the bank you already have a relationship with. See what else is out there to ensure you're working with a bank that offers the kind of service that would best benefit your business.

How does the application process work?

The application process typically begins as soon as you hand a loan officer financial documents for your business. While it can vary from bank to bank, here’s what usually happens:

  1. Get a preliminary proposal. Your banker can give you an idea of what you might qualify for — or a quick no — during your first meeting, based on your basic financial documents.
  2. Submit more documents. You’ll likely need to submit more documents in order to go through your finances and decide on the type of financing, rates, terms and amounts they're willing to offer.
  3. Wait for a decision. The application is considered complete as soon as your banker has enough information to make a decision. You should receive a response within 30 days of submitting your documents.
  4. Discuss the proposal. Often, loan officers will come to you with a slightly different proposal than you had in mind, based on their analysis of the submitted information. A good banker will walk you through any terms you don’t understand and explain the process it used to come up with these terms. They should also explain the process of how they arrived at the proposed structure.
  5. Review and sign your loan commitment. When presented with a final commitment, review the loan amount, rate, payment amount, amortization, fees, guarantee information, collateral to be pledged, reporting required and the maturity date of the loan before closing.

Often, your loan commitment will require you to keep your banker up to date on your business’s finances. You might be required to supply business financials on a yearly or even monthly basis during the term of your loan.

This can help your loan officer stay alert to early warning signs that you might miss a repayment — and in turn, help your business get back on track before that happens.

What documents do I need to provide?

While it depends on the business, community banks typically ask to see the following documents during the application process:

  • Personal financial statement for all owners
  • Personal taxes
  • Multiple years of business taxes
  • Income statements and balance sheets
  • Interim financial statements
  • Financial forecast of the next 12 months
  • Other financial schedules for any accounts receivable, inventory or accounts payable

Pros and cons of working with a community bank

Borrowing from a community bank can be highly beneficial, though there are a few drawbacks to be aware of.

Pros

  • Flexibility. Community banks are much more flexible in both analyzing and responding to requests for financing. They typically have fewer processing requirements than larger banks, which can mean a faster turnaround time.
  • Strong relationship with your lender. Most of the time, you'll be working with the actual decision-maker when you borrow through a community bank — or at the very least will have contact with the final arbiter of the credit decision. This allows a personal touch on both sides, as you get to know them and they get to know you.
  • Small business experts. Since community banks typically deal with smaller clients, they'll likely understand your business better than a larger bank. And they'll also generally see you as a more important client.
  • Can anticipate future financing needs. As your banker gets to know you, they can see when you might need financing in the future and help you prepare the appropriate documents so that financing is available when you need it.

Cons

  • Limited experience. There’s a chance you’ll work with a banker that hasn’t been exposed to larger, more complex financing structures. These types of green bankers tend to force a one-size-fits-all approach on all of their clients.
  • Limited personnel resources. Often, community banks have limited staff that can easily get overwhelmed with credit portfolios of larger clients that require a lot of attention. This might limit how much time they can spend with any one client.
  • Low tech. Community banks often don’t have the funds or resources to invest in technology. Don't be surprised if the local bank you end up working with doesn’t have the most up-to-date services for cash management or the most user-friendly website.
  • It could be bought out. It’s possible that your community bank will be acquired by another bank — which could mean you’ll get a lower quality of service or have to switch banks entirely.

Hot tip: Use an online business loans marketplace to find a community bank lender

If you're interested in borrowing from a local bank, but aren't sure where to start, using an online business loans marketplace like Lendio or Kabbage could be helpful. They both work with community banks around the country to help small business owners find financing.

You typically fill out one online form to get connected with a community bank who might be able to provide you with financing. This can give you a starting off point if you're overwhelmed by the many options available to you and aren't sure where to start.

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Kabbage small business loans

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What can I do if I’m turned down?

If your business isn't approved for the loan, your bank should tell you why. Typically, you’ll receive a declination letter that explains the reasons your application was denied approval.

Often, a turn down is a “no for now.” Consider talking to your loan officer about steps you can take to improve your business so that you can qualify for financing in the future.

Why was my application rejected?

It really depends on a variety of factors, which might include insufficient cash flow, inadequate collateral, insufficient equity or low guarantor credit scores.

To fix these issues, you might need to adjust your tax strategy or invest more personal equity in your business. In other cases, you might need to actually slow down growth to avoid going out of business. Or you might have to face the reality that your firm is not solvent and has no other choice but to shut down.

Can I get a loan elsewhere?

While community banks aren’t your only option, make sure you understand why the bank thinks a loan isn’t worth the risk. Hold off on applying for other types of financing until you’ve fixed the issues that the banker cited, if possible.

Bottom line

Developing a lending relationship with a community bank can be a great investment for your small business. But not all community banks are created equal. When deciding on the right one for you, look for an experienced lending team that takes the time to get to know your business.

Read our guide to business loans to learn more about how financing works.

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