5 Reasons to Go Local With Your Small Business Loan

by John Rampton

4 min read

When it comes to getting a small business loan, the conventional wisdom is “bigger is better,” right? So, when it comes to dealing with a bigger bank over a smaller one, doesn’t that mean you should go big? Not necessarily. Smaller banks can offer a number of advantages you won’t find at their larger counterparts. In fact, around two years ago when I got a loan for my company, I chose to go to a small local bank to get funded.

There were many reasons why I opted for this route, but here are five of the best reasons to choose a smaller bank over a larger one.

1. You Talk to Your Lender Face to Face, Not Face to Screen

I could meet directly with the person making the decision about whether I would be approved or not. This gave me the opportunity to make a personal connection with the small local bank, which already prided itself on service and customer relationships. By personally presenting my business idea, how I would use the money and proof that I had a way to repay the loan, the local bank got a better sense of who they were lending money to.

2. You Won’t Get Lost in the Crowd

The bank staff already knew me because I had been banking with them for years and had a track record of accounts, credit card payments and more. There were no overdrafts or late payments. They knew that I had borrowed before to get a car and a mortgage, so this lowered the risk in their minds. I wasn’t just a number, but an actual face that they could put with the credit score.

3. No Hold Times or Delayed Responses

When I had a question about the lending process, I could also call or stop in to get an answer. This personal contact was just as important to me as it was when I was applying for the loan.

4. Lower Cost of Doing Business

In order to compete with other lenders, my small local bank also offered very competitive loan terms, including a low interest rate and longer repayment period. While I had the option of the community bank, there were other options, like branches of the bigger banks that are now starting to pay attention to the small business owner. For example, JPMorgan Chase reported that it provided $19 billion in credit to U.S. small businesses in the fourth quarter of 2013.

5. You Won’t Be Told What to Do

My local bank did not want a piece of my new business. In fact, they did not want to play a role in any strategic decisions or expect anything back, except to have the loan repaid with interest within the designated period. Other than that, I was on my own to ensure that I could create a viable and sustainable business that would generate the revenue I needed to repay the small business loan.

All of these advantages provide a compelling reason to opt for this route over other choices. It’s better than dealing with online lenders, with whom you have no relationship outside of mouse clicks and checkboxes. Going with a smaller bank allows you to avoid outside investors that want to own part of your business, make decisions and take a chunk of the profits long after their initial investment has been paid back.

I realize, however, that small lenders may not be for everyone, because there are also drawbacks that need to be considered. These include:

  1. Aversion to Risk: Getting approved can be challenging due to a smaller bank’s higher underwriting standards, as well as a decreased tolerance for a bad loan.
  2. Higher Rates: Many local banks may still charge higher rates, and may offer shorter repayment schedules than you can handle.
  3. Startup-phobia: Larger banks may be willing to lend to an existing small business, but they most likely will still turn down a startup. A community bank might be more willing to take a chance like the one I chose for my business.

Before I applied for any type of loan or went to a funding source, I made sure that I knew what the terms of repayment required, as well as any other expectations set forth in the loan agreement. I also considered the amount of money that I really needed against the amount that I could bootstrap. I also had a plan on how I would spend the loan, which helped me make sure I maximized the value I was getting from said loan.

If you’re thinking about getting a loan but would like to learn more about other options, such as equity financing, go to our article on figuring out whether an investor or a loan makes more sense for your small business.

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