By: Wendy Kaufman
May 25, 2012
When small-business owners start looking for money to expand, they often begin at a big bank. The banks are highly visible, well-known and often nearby.
But many small-business owners report that they have struggled to get loans in the wake of the economic downturn.
Ami Kassar, CEO of the small-business-loan broker multifunding.com, advises business owners that large banks are "not the best place to start" when looking for a small-business loan.
Kassar has created bankinggrades.com, a website that gives every FDIC-insured bank in the nation a grade based on how many small-business loans it makes. He used data from the Federal Deposit Insurance Corp. to create the site, designed to help small-business owners find the best loan.
Turned Down Cold
Patricia and Jim McGrath own Branches Atelier, a preschool in Santa Monica, Calif. Their existing space had grown too small and they wanted to expand. Late last year they found the perfect site, but they needed a loan to buy the building.
"So we first approached my own bank," Patricia McGrath says. "It's one of the large banks, and I've been banking with them for over 20 years. And it made sense that we would go with people that we knew."
The McGraths thought it would be a relatively simple process. Their business was solid financially, they had money for a down payment and they had always had a long waiting list of prospective students.
Moreover, the mortgage payment on the new building would have been little more than their existing rent.
How Banks Are Rated
Bankinggrades.com says it rates banks based on past loan and deposit values in quarterly FDIC data. The website defines small-business loans as commercial loans of $1 million or less.
A (Excellent): Uses at least 25 percent of its deposits to make small-business loans
B (Good): Uses 10-25 percent of its deposits to make small-business loans
C (Average): Uses 6-10 percent of its deposits to make small-business loans
D (Poor): Uses 3-6 percent of its deposits to make small-business loans
F (Failing): Uses less than 3 percent of its deposits to make small-business loans
Source: Banking Grades
Even so, the bank -- one of the nation's very largest -- turned them down cold.
"I was shocked. We have excellent credit, and we have money in the bank," Patricia McGrath says. "I couldn't understand why they wouldn't be willing to give us a loan. It didn't make any sense to me."
Big banks "are able to go out and lend hundreds of millions of dollars here and there," Kassar says. "For them, these little loans are a pain."
He says many small-business owners may have better luck with smaller banks.
"In comparison, for smaller banks, the community banks, their business is small-business lending," Kassar says. "And that's the best choice, in our opinion, for small business to go to get a loan."
Very small loans don't produce much profit for big banks. But community banks typically have a mission beyond making money. Many want to help build and enhance their communities -- and many of those institutions top the Banking Grades list.
Bigger Banks Wary
Banking Grades rates banks based on the ratio of business loans of $1 million or less to total domestic deposits.
The Financial Services Roundtable, which represents big banks, quarrels with the metric. The group argues that the measure doesn't consider all factors. It also cites efforts by large banks to increase their small-business lending.
But Keith Weigelt, a small-business-finance expert with the Wharton School of Business, says Banking Grades can be a valuable tool for small-business owners.
"If I was a small business, I would welcome that," Weigelt says. "First of all, it would save me an awful lot of time in terms of search costs."
Indeed, the McGraths say they spent an incredible amount of time and energy trying to secure the loan for their preschool. In addition to being turned down by their giant bank, they were strung along -- and then rejected -- by a midsized one.
Small Businesses Staying Lean, Wary Of Hiring
Some owners say they've learned to make do with less and are unlikely to add many workers.
Finally, the couple turned to a community bank, Orange County-based Plaza Bank.
That's where they found a banker who wanted to give them a loan -- and then did.
"Ultimately, if you don't get the right bank -- no matter how good you look on paper -- you're not going to be able to move forward with your business," Patricia McGrath says. "And that's really unfortunate."
The McGraths are nearly done painting their new building, and they're working on a new play structure and a garden.
They are also hiring -- adding about a half-dozen full-time jobs.