Community Banks Increase Small Business Loans

As big banks struggle, community banks are stepping in to offer loans and lines of credit to small business owners

By Stacy Perman

About six months ago, David Klein, owner of Scientific Fire Prevention & Environmental Services in Long Island City, N.Y., decided to apply for a bank credit line because he was concerned about the tottering economy. Klein says he approached a handful of large banks including HSBC (HBC) and Washington Mutual (JPM) about his healthy, $9 million, 100-employee cleaning services company. He initially garnered interest, but soon found himself lost in bureaucratic shuffles. As talks continued, Klein became frustrated with the length of time it took to receive term sheets. When they did arrive, he found most of the terms "vague and unfavorable," and he had difficulty reaching bank staff. As the economy continued to crater, Klein decided he didn't want to do business with a bank that not only had poor customer service but one that might also be saddled with toxic assets.

Then Klein met the chairman and CFO of Cross River Bank, a small, recently opened community bank in Teaneck, N.J. Within three weeks of meeting about a credit line, Klein received a term sheet and not long after secured a $750,000 revolving line of credit. Compared with his previous experiences with larger banks, Klein was pleased. "They were easy to get a hold of and responded quickly to anything that we needed," he says. "We were able to negotiate things on the term sheet to the point that we were comfortable."

As the credit freeze continues and the recession deepens, many community banks, generally defined as having less than $10 billion in assets, are reporting an uptick in loans and credit lines to small businesses. At a congressional hearing on small business and the economic recovery earlier this month, economist Paul Merski, of the Independent Community Bankers of America, a Washington (D.C.) trade group, told lawmakers that community banks make 20% of all small-business loans, even though they represent only about 12% of all bank assets. Furthermore, he said that about 50% of all small-business loans under $100,000 are made by community banks.

Seizing the Opportunity

Indeed, for the past two years, small-business lending among community banks has grown at a faster rate than from larger institutions, according to Aite Group, a Boston banking consultancy. "Community banks are quickly taking on more market share not only from the top five banks but from some of the regional banks," says Christine Barry, Aite's research director. "They are focusing more attention on small businesses than before. They are seeing revenue opportunities and deploying the right solutions in place to serve these customers."

Early on, Cross River Bank, which opened last November, saw the slowing economy as an opportunity to get into the community-banking business and to build lending relationships with small businesses. "It was very opportunistic for us to be in this environment," says Gilles Gade, Cross River's chairman and CFO. "Many small businesses are being declined by other banks that are having issues, and we stepped in." Gade says that Cross River, with $20 million in assets, closed 11 small business loans worth $9 million in its first two months and has a further 15 worth $10 million in the pipeline. "We are seeing 10 to 20 applicants a week," he says.

Some of the factors that make community banks attractive during a strong economy have added appeal for business owners dealing with the effects of the downturn.