Community Lending Instituitions - The New Face of Small Business Lending
The federal government is taking all-new interest in jump-starting small businesses in this country, a sector it calls the engine of the economy. In many places, private banks and other lenders are beginning to trust small businesses a little bit more , and small business lending is up. Where is all the small business lending coming from now? Mostly, they are coming from community development financial institutions - a fancy term for credit unions, nonprofit banks, venture capitalists and other kinds of lenders. For businesses in rural areas or in small towns that don't really have a proper banking network, these are everything they have.
Small business lending from these sources is holding the sky up as far as business owners are concerned; traditional banks and other places are still waiting it out. And institutions that seem ready to take on risky small business lending are seeing much higher levels of demand than they could ever handle. It's just that these incidental lending sources happen to be, let's say, more flexible. If you went to a bank, and all you had to put down as your collateral was a truck owned by your business, they wouldn't really accept it. Not so with these new sources. The interest rates they charge are higher than 13% though. And what is more, when you get a loan from a nonprofit lender, they throw in some free business advice with training workshops and conferences to help new businessmen find their feet. With most lenders last year, the charge-off rate was about 2.5%. At these unconventional lenders', Meanwhile, it was less than 2%.
Community development financial institutions work kind of like venture capitalists do. They bet on high-risk unproven ideas from people that traditional banks would be too scared to take on. It's all about the community that they care about; it could be a new business idea or an approved and established one; if it intends to bring new jobs and services to the community, they want to be a part of it. They don't just deal with little start-ups alone, either. Any business that has from 25 to 50 employees that needs a loan to expand in the area, the community lending banks will put up, up to $10 million in the hopes that they will bring new jobs to the area. Communities are no longer relying on the big manufacturers to come in and bring in jobs. More and more, they see the small players with their 20 or 50 jobs as the horses to bet on.
At a time when obtaining credit remains expensive and unreliable around the country, small business lending is really soaring at the community institutions. And this isn't a phenomenon that's happening independently of the banks. It's happening with their blessing. Let's say that you go to the Bank of America for a small business loan; they might feel that you are too untested an entity for them to deal with; so they will look up their friends over in the community lending banks they know of, and put in a good word for you. And then they'll keep tabs on you too. If it turns out that you repay your loans well at the community lender, they'll ask you over one day and say, "Let's do business".