9 things about community bank business loans you’ll wish you knew sooner
A long-term relationship with a local lender might be key to your small business’s success.
I’ve written over a thousand articles about lending, but never fully understood what goes on after you submit a loan application. Lenders guard that process like Coca-Cola guards its formula — it’s a trade secret.
So I did the next best thing besides quitting my job to work at a bank. I signed up for a course to become a certified commercial loan officer through the Independent Community Bankers of America.
Here are a few key insights I picked up during my training that every small business owner needs to know.
1. Community banks have been a small business lifeline during COVID-19.
Since the start of the coronavirus outbreak, community banks have stepped up to support small businesses when big banks and online lenders failed. They funded over 57% of all loans through the Paycheck Protection Program (PPP).
They also got those PPP loans into the hands of small businesses faster than other types of lenders — despite the fact that many opened PPP loan applications later than larger banks. The majority of these borrowers were from communities that have faced discrimination in lending, such as BIPOC owners, women and veterans.
This shouldn’t be a surprise. Historically, they’ve been a lifeline for the little guy.
2. Building a relationship with a community bank can help your business save money.
Yes, banks already tend to have the lowest rates out there. But having a long-term relationship with a bank can help you save even more on the cost of financing in the future.
That’s because trust and risk are huge factors in the rates and fees your business receives. A long, positive track record with a bank can spell lower rates on future loans.
3. You might not get the exact loan you applied for — and that’s a good thing.
It’s rare for community bankers to give an unqualified yes to a loan application. That’s because your loan officer takes a deep dive into your finances to look at what type of financing would really help your business.
In some cases, they might suggest a different type of financing — like an equipment loan instead of a line of credit. Other times, it might be a different loan amount. Listen to these offers. They might save you from taking out a loan your business can’t afford.
4. A rejection could be a sign that your business is in trouble.
Community bank loan officers are experts at spotting signs your business needs to make changes if it wants to stay open. And they won’t be shy about telling you.
If they see red flags, they might tell you to come back after you’ve made adjustments. Or they may send you to an alternative lender to tide you over in the mean time.
But a commercial loan officer worth their salt shouldn’t give you a rejection without explaining why or suggesting next steps.
5. Eligibility requirements can be flexible — if there’s a good reason.
Community banks can be vague about the requirements to get a business loan. It’s not because they don’t have standards, like credit score cutoffs. But loan officers have license to make exceptions to these rules. That is, if there’s a reasonable explanation.
For example, if you have a poor credit score after going through a divorce, your loan officer might not count that against you. But if you have poor credit because you decided you just didn’t want to pay your car loan anymore, you’ll get a strong no.
6. Getting creative on taxes will come back to bite you.
Character — or your personal trustworthiness — is a huge factor in your loan application. Your loan officer will be looking for signs that you’re honest and stand by your word.
If you lied about your business’s assets to save on taxes, your lender will likely catch it. Often, they’ll take this as a sign that you might try to get out of your loan repayments one day.
7. Your lender will know if you’ve misspent the funds.
Most commercial loan agreements require you to submit financials at least once a year. It’s pretty obvious if you’re using a loan to buy a Lamborghini instead of new equipment.
At the very least, this will damage your relationship with the lender and disqualify you from future credit. And it will also likely hurt your business — it probably needed those funds if you were able to get approved.
8. Community bank loans can be faster than other lenders — down the road.
It might take a few weeks — or even months — to get your first loan with a community bank. But once you’ve established a relationship with the lender, they can anticipate future financing needs.
For example, if they see that you’re spending a lot on equipment repairs, they might take steps to prepare a new equipment loan so the funds are readily available as soon as you need them.
9. In the end, a community bank might know your business better than you do.
It’s your lender’s job to regularly check in on your business to make sure things are going smoothly. It’s also their job to catch problems before they arise. They can tell when you’re growing too fast to keep up with demand. Or when you need to prepare for an owner nearing retirement.
An experienced commercial loan officer is by default an expert in business finances. If it looks like you need help, they’ll point you in the right direction. After all, it’s in their best interest to help you succeed.