Small business? Consider a small bank for your credit needs

Written by
Richard Barrington
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If you have a small business, you probably recognize how your customers benefit from choosing a locally-owned company as opposed to an impersonal multi-national firm. So why would you consider using a huge, multi-national bank?

There are both tangible and intangible benefits to thinking small when it comes to choosing a bank for your company’s credit needs. While mega-banks may hold the edge when it comes to advertising budgets, a smaller bank may be able to deliver more actual benefits for your business.

Better financial terms

Certain big, national banks are household names. So, people tend to think of them first when they’re looking for financial services. However, overlooking smaller banks and credit unions can cost you. Those smaller financial institutions are often able to offer better financial terms.

Big banks have a lot of overhead to support. For one thing, there’s all that advertising. Super Bowl ads don’t come cheaply.

On top of that, big banks have the most extensive branch networks. That’s a lot of real estate to pay for, and considerable staffing costs as well.

These costs are especially high in major metropolitan areas. This means that even if you’re in a small town, dealing with a large bank could mean helping to pay for their big-city real estate and personnel costs. That expensive branch network doesn’t help you any if you’re a local business doing its banking at one location.

The cost burden of large banks is often reflected in the financial terms they offer customers. As one example, the Consumer Financial Protection Bureau (CFPB) did a study that found the largest 25 credit card issuers typically charged credit card rates that are eight to 10 points higher than those charged by small-to-medium banks and credit unions.

Large banks are also more likely to charge credit card fees. The CFPB study found that 27% of credit cards from large issuers have annual fees, compared with just 9.5% from small firms. Not only are those annual fees more common with large credit card companies, but they also tend to be higher. The average annual fee from large credit card issuers is $157, compared to $94 from smaller ones.

The same pattern is repeated with other financial products. Deposit money with a large bank, and you’ll often find yourself earning a very low interest rate. You might get a much higher rate from a smaller bank.

A wider field of choice

Banking is a very top-heavy industry, meaning a relatively few firms dominate the bulk of the business. For example, the 14 biggest banks held over half the commercial and industrial loans in the U.S. last year. However, there are more than 4,000 other FDIC-insured banks out there, not to mention thousands of credit unions.

Those smaller institutions won’t necessarily offer better terms on loans, credit cards and deposit products. However, choice is power. Having more options to choose from gives you a greater chance of finding better terms. Considering smaller banks and credit unions will exponentially expand the number of choices you have.

EDITOR’S NOTE: While small banks and credit unions may expand the options available to you, they don’t always offer the best deals on rewards-earning credit cards. If you’re looking to earn big on business purchases, you still might need to look beyond what small banks can offer. If the small bank or credit union of your choosing doesn’t offer you a credit card that meets your needs, our list of the best business credit cards is a great place to expand your search.

Jennifer Doss,
Executive Editor, CardRatings

Community orientation

Smaller institutions often have a stronger connections with their local communities. They recognize that their reputations depend greatly on the positive experiences of people in that community. Also, their financial fortunes are tied more closely to the local economy.

For a large bank, your local community may be just a tiny portion of their total market. This may make them less likely to offer more responsive service and better financial terms to businesses in your community.

In contrast, for more localized banks, businesses like yours represent a greater share of their market. That should make them more responsive to your needs.

Greater possibility of customization

The financial needs of businesses are not one-size-fits-all. Unfortunately, larger banks may not be able to provide the customization you need.

For larger banks to realize the economies of scale that allow them to benefit from their size, they need to offer off-the-rack solutions. For smaller financial institutions, there is less of a mass-production infrastructure. That may make them more flexible in customizing loan terms or other financial products to fit your needs.

According to a McKinsey study, the most important thing to a small business when choosing a bank is strong relationship management. A small local bank may be better able to provide a relationship manager who understands your business and its needs. That’s a lot better than having your first point of contact be a phone tree.

Localized decision-making

With a smaller, locally-based bank you can be closer to the decision makers than with a large institution.

This doesn’t just help because local executives may be more responsive to the needs of local businesses. It can also make for a more streamlined decision-making process. Rather than having to wait for decisions to be sent up the chain of command to headquarters in another state, a local bank can offer more immediate access to people with authority.

The McKinsey study referenced earlier found that the biggest reason for small businesses changing banks is that they sought easier access to credit. Localized decision-making could provide you with the access you need.

Better customer service

As you probably know from your own company, people who run small businesses take what they do personally. That creates a culture of commitment that spreads to the staff around them.

For customers, this can mean dealing with people who are doing more than just going through the motions. Small bank representatives know they are working for people who take personal pride in the bank’s reputation. They answer to local people, rather than a faceless committee miles away.

Privately vs. publicly-owned

Besides the neighborly touch of a local bank, there’s a difference between dealing with a privately-owned company as opposed to a publicly-owned one.

Publicly-owned companies answer to shareholders, who are generally very impatient for profit growth. This tends to create a short-term mentality in those companies. Management is often under pressure to cut costs and squeeze more money out of customers to boost next quarter’s earnings.

Small business owners answer only to themselves. Of course, they’re also interested in profits, but they can exercise the patience to build them over time. That’s why you may find small banks are more willing to invest in the business and cultivate long-term relationships.

None of the above should suggest that large banks can’t do a fine job in some situations. It does mean that you should look beyond the household names and consider local options as well. More choice will give you a better chance of finding the right products, service and organizational fit for your credit needs.

Richard Barrington
Cardratings Contributor

Richard has over 30 years of experience in financial services, including 23 years with the investment management firm Manning & Napier Advisors, Inc., where he led the Marketing Group and served on the firm’s Investment Policy Group and Executive Group. Over the years, Barrington has...Read more

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