By: d-mars.com
FED Small Business
Small business owners are increasingly opting for loans from large banks over small community banks, marking a shift observed over recent years. In 2019, a Federal Reserve survey indicated a near equal preference for both large and small banks among small businesses, with 35% applying to large banks and 33% to small ones.
However, by 2023, this trend had shifted significantly, with 44% of small businesses choosing large banks compared to only 28% opting for small banks. Experts suggest that while factors like the COVID-19 pandemic and recent banking crises have influenced this trend, they aren’t the sole reasons behind it.
According to Mike Clarke, previously a community bank founder and CEO and currently a senior portfolio advisor at FJ Capital Management, smaller loans such as lines of credit and cash advances are not lucrative for community banks.
As a result, larger banks, which have streamlined the process of automating such loans, are better equipped to serve small businesses, even those falling below the $250,000 or $400,000 threshold.
“With respect to small banks, they have largely ceded this market segment to the large banks with automated competency just as they ceded credit cards and low balance consumer loans long ago,” Clarke detailed. “I don’t think this means small banks have lost their relevance. I think this further tightens the deliberate market niches where they are successful.”
While more small businesses are seeking loans from larger banks, they are more likely to be approved by smaller banks, according to a Federal Reserve study. Small banks denied only 25% of small-business applications, compared to 34% at large banks, and approved 83% of low-credit risk small businesses, compared to 76% at large banks.
Jamie Card from The Bonadio Group attributed some of this shift to demographics, as younger entrepreneurs opt for larger banks due to technological capabilities and service offerings.
However, liquidity concerns and compressed margins at community banks have led to tightened lending standards, further driving customers toward larger banks.
“As small businesses are opened up by younger and younger people that don’t have established relationships with a community bank or credit union, they chose to ‘bank’ at a ‘big bank,’ which provides them ease of use with vast technological capabilities and a wide breadth of services,” Card said.
The recent banking crises, including high-profile bank failures and Federal Reserve interventions, have also contributed to the trend toward larger banks, perceived as too big to fail.
Lou Haverty, founder of Tank Retailer, emphasized the importance of customer service for community banks to reverse this trend.
Rick Kuci, COO of FundKite, noted the significant deposit growth in large banks compared to the shrinkage in smaller banks, leading to consolidation within the industry. He predicted that while community banks remain a primary source of financing for small businesses, online lenders may continue to gain popularity due to their speed and convenience.
“Smaller community banks have always been the main source of financing for small businesses. That trend will continue,” Kuci said. “However, small businesses are realizing the benefits of online lenders and the speed of their delivery of financing products versus traditional bank financing. I think that trend will continue to grow.”
Additionally, startups have diversified their banking relationships following the collapse of Silicon Valley Bank, with many now holding accounts with multiple banks. Healy Jones of Kruze Consulting highlighted the growing demand for mobile banking services among startups, leading to a shift toward newer banks like Mercury and Brex.
