Small businesses are the backbone of the economy, and small banks give them the power they need. Just like local businesses, community banks make better choices for local economies than their too-big-to-fail counterparts. As it turns out, they also face many of the same challenges.
Community banks and credit unions are known for their relationship-based banking style. They exist to serve a local base of clients, rather than a global portfolio, which allows them to treat each client as an individual and develop a more personal relationship with them. As a result, community banks and credit unions can provide more flexible options for clients. In many cases, this means that a small business or a local group of entrepreneurs can get the financing they need, even though they may not qualify at a big bank.
This “relationship banking” explains why credit unions and small and mid-sized banks provide a majority percentage of small business loans, despite having a smaller share of the market and fewer assets. In 2014, these lenders provided 60 percent of small business loans, while holding just 24 percent of all banking assets, according to the Institute for Local Self-Reliance (ILSR).
A smaller share of assets shouldn’t suggest a lesser ability to judge risk, either. Small banks and credit unions boast a lower percentage of bad loans than giant banks year after year. Around 2010, bad loans reached a peak among all financial institutions, but they accounted for more than three percent of giant banks’ lending, small banks and credit unions stayed more stable, with a bad-loan rate of just about one percent. Small banks don’t necessarily have the power or prestige of big banks, but they often make sounder decisions about lending, which is good news for the small businesses and local economies they serve.
Despite these benefits, community banks and credit unions have struggled to stay afloat, thanks to complex regulations and stifled growth. As ILSR reports, one in every four community banks has disappeared since 2008 – a total of nearly 2,000 banks. During the financial crisis, regulators encouraged consolidation within the industry, and most of these once-healthy small banks were acquired and absorbed by larger banks. New regulations have disadvantaged smaller banks by making compliance a lengthier, more difficult process. Additionally, virtually no new small banks have been created during the same time. Since the end of 2010, regulators have approved just one new bank.
Community banks and credit unions are essential to protecting our local economies and the small businesses that drive them. They make decisions from a local perspective, they have a direct sense of what’s good for the community, and they forge partnerships that carry out these ideals. For example, Asheville Grown, a buy local group in western North Carolina, created an innovative program with the Self-Help Credit Union called the Go Local CD (certificate of deposit). Investments made through the Go Local CD exclusively fund small businesses, including green businesses and women- and minority-owned businesses. The CD promises higher dividend rates than standard savings accounts and guaranteed returns.
The American Independent Business Alliance (AMIBA) has put together several resources for finding community banks and credit unions. To learn more about these institutions and shift your finances, access AMIBA’s tools here.
To promote growth and investment in your community, shift your banking to a local bank or credit union. You’ll get a customized approach to your finances and your community will reap the rewards of your investment.
Independent We Stand is dedicated to helping independent businesses across the country engage their communities and encouraging customers to buy local. If you’re a business owner, get buy local resources, tips and news by registering at www.independentwestand.org/membership/. Your business will also be included in our ‘locals only’ search engine and mobile app. If you’re a consumer, take the pledge to buy local and find local businesses in your community at www.independentwestand.org/take-a-stand/join-the-movement/.