Running a small business is no child’s play. It requires a lot of tenacity and determination. And when it comes to financing your business operations, it’s almost impossible to do so with funds from your pocket. Whether you’re just trying to stay afloat or need to expand, a time will always come when you’ll need extra working capital.
However, when you need to raise more money for your small business, who should you go to — the big banks or the small ones?
Let me briefly give you a few good reasons why small businesses should avoid big banks.
1. Big Banks Have More Beauracracy
One of the main reasons you must avoid big banks as a small business is that they have too many rigid policies. These make them difficult to work with as they rarely break protocol to accommodate a small business’s unique needs.
Smaller banks have an advantage here as they are more flexible in terms of the packages and services they offer small businesses. In the same vein, small banks are more supportive of local businesses. This is because they know that as your small business succeeds, you’ll bring in more business for them. As a result, you can better negotiate for better terms and fees.
With big banks, there’s no room for negotiating. You either concede to their terms or look for another banking partner.
2. Big Banks aren’t Interested Small Business Loans
Let’s be honest here. Banks, big and small, are also out to make money. And one of the main ways a bank makes money when it grows is through service fees.
As a bank grows, it begins to shift its business model to rely more on income from fees and investments. They move away from focusing on interest on loans (especially for small businesses) as service fees and exotic investments promise higher returns. While big banks tend to focus on the investment side of their business, they do support businesses with loans. However, they prefer to give them to big companies as they borrow larger chunks of money that bring in more profit in the form of interest.
Small banks, on the other hand, make their money from the interests they charge on loans. For one, they can’t afford to pay the (high-salaried) financial analysts needed to manage the investment side of banking. Because of this, small banks are more likely to help you when you need a cash injection.
3. Big Banks Charge Higher Fees
Speaking of big banks and fees, one of the main reasons you should avoid big banks is that they usually charge more and higher fees than small banks. The high charges are mainly because they have to make money for their investors. And you, as the small business, bear the brunt.
While small banks also have to make a profit, the pressure isn’t too much on them to do so as it is with the bigger banks. This way, they don’t have to charge their customers steep fees.
4. Small Banks Understand Your Business Better
A big advantage of working with a small community bank is that they understand your business. They know the environment you’re doing business in and understand your market better than the big banks would. As such, they’re more flexible to tailor their packages to align with your needs.
On the same note, if your business serves the local community, a small community bank’s local expertise will go a long way in helping your business grow. A business must do all it can to ensure high customer satisfaction rates, and that’s one strength small banks have over their big counterparts.
5. Small Banks Offer Better Customer Service
One of the most significant disadvantages of big banks is that they have rigid systems and processes. As a small business, you may have to jump over a lot of red tape to get the help you need. Especially with most banks using a centralized customer service department, you may be forced to call a national toll-free number for help with an issue. This makes the process of getting help longer.
With a small bank, it’s easier to get personalized service. Research shows that smaller banks have better customer support than bigger banks. And for a small business, good customer service is essential as it helps ensure there’s no downtime at any point in your business. Whether you reach out to them email, or phone, it’s likely you’ll get a faster response. When you get good customer support from your bank, it allows you to serve your clients better.
6. Big Banks Won’t Hold Your Hands
An essential ingredient of business is building relationships. And the area of relationships is one in which many big banks fall short. Sure, they assign bankers to be responsible for your accounts and encourage you to forge working relationships with them. However, because they serve so many customers, they can’t really dedicate a lot of time to you.
Small banks shine when it comes to relationships. With a small bank, you can forge meaningful relationships that benefit both the bank and your business. This is especially true since community banks have lower turnover rates than big banks. As a result, you usually work with the same banker for many years. Working with the same banker makes it easier for your bank to know your business inside out. They’ll also understand your needs better, leading to faster and better service.
If you’re looking for a bank that will hold your hand and empathize with you on your entrepreneurial journey, you won’t get that from the big banks. You’re better off with a small bank. And in today’s world of remote work, you need a bank that’s willing to go the extra mile without you having to bang on their virtual doors constantly.
Should You Really Avoid Big Banks?
As a small business, the big banks vs. small banks debate is a no-brainer. You’re better of with an institution that understands you and is willing to negotiate terms with you. Big banks usually don’t fit that bill and thus should be avoided. You’re better off dealing with small banks.
Guest post courtesy of Neal Taparia
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