A community bank is often created to help fuel economic activity in designated areas. This can help small business startups in several ways. For example, the government established the “Small Business Lending Fund” as a result of the Small Business Jobs Act of 2010. The Small Business Lending Fund provides qualified community banks with loans that have interest rates as low as 1%. Community banks re-loan the money to qualified small business borrowers at a higher interest rate (than what they borrowed).
Community banks usually create microloan programs using the funds obtained via the Small Business Lending Fund. Microloan programs are typically designed to capitalize local businesses and create local jobs. Local business owners that will not qualify for financing from traditional financial institutions such as J.P. Morgan Chase (etc.), may qualify for financing at a community bank. Click here to find a community bank in your local area that participates in the Small Business Lending Fund.
Open Your First Business Savings or Checking Account with a Community Bank
The best community banks not only provide financing to local small business owners to stimulate the economy, they also offer other business friendly banking products and services. Community banks typically offer free business checking accounts and you can open a business savings account with as little as $5.00. You will also have access to a debit card (that’s connected to your business checking account), online banking, and mobile banking apps. Having different ways to access and track your money, will make managing the finance and accounting aspect of the business revenue much easier.
How to Choose the Best Community Bank for Your Small Business Startup
There are many ways to determine which community bank is right for you. Some of the most important things you will want to look for to choose the local community bank that’s best for your small business is:
- Product and Services Offering – The best community banks will offer a multitude of financial services to small business owners. This can includes depository services (checking and savings accounts), loans and lines of credit, and financial counseling services. Financial counseling services could include mortgage counseling, credit counseling, business exit planning (i.e. what happens to your business if you die), and debt counseling.
- Amount Needed to Open an Account – There are many community bank that don’t require you to actually deposit money into an account upon first opening it. I’ve noticed that community banks give you the option to open a free savings account, while at least $50 is needed to open a business checking account. The amount needed to open the accounts should be reasonable for your business.
- Account Fees – Some business checking accounts charge a fee for each transaction made on the account. Depending on the community bank, you could be paying $0.02 per transaction (and receive the first 100 transactions free). The fewer the fees, the better.
- Account Minimums – Some community banks will require you to keep a certain amount of money in your business checking or savings accounts every month (or be charged a fee). For example, a local community bank may require you to maintain a $500 balance in your business checking account at all times. If $500 isn’t in the account, they may charge you a monthly maintenance fee. Always check the account minimums and ask if there are any maintenance charges should you not meet the monthly minimum balance requirements.
- Online Banking and Internet Banking – Being able to track your account online via the internet enable you to stay on top of your business finances at all times. The best community banks will have an online web portal where you can login to view your transactions and account balances.
- Mobile Banking – Mobile banking is just as important as online and internet banking. For business owners that are constantly on the go, mobile banking is 100% necessary. Mobile banking enables you to check and track your account from anywhere in the world as long as you have a cell phone. The best community banks will offer a mobile banking application that can be downloaded on your smartphone.
- FDIC Insurance Coverage – If a community bank (or any bank for that matter) doesn’t have deposit insurance coverage, run! FDIC insurance insures your money up to $250,000. So if you’ve deposited $500,000 in one bank and they go out of business, all of your money will not be lost. You will get $250,000 of your money back because of FDIC insurance. The other $250,000 will be gone. (Just a bit of advice, never put more than $250,000 in an FDIC insured community bank or lending institution).
- Friendly Bank Staff – The one thing that makes any company or organization great is its people. If you plan on building a long term relationship with your local community bank, you’ll want to connect with the people who work there. Building rapport with your business banker may contribute to you getting approved for business financing in the future.
Community Development Financial Institutions Can Also Help You Grow Your Small Business Startup
I mentioned earlier in this article that community banks often provide financing to local business owners that may not qualify for financing from traditional financing institutions (i.e. large banks like Chase). While this is true, many community banks still don’t provide funding to borrowers from low-income, high distressed areas. For example, a local community bank in Michigan (where I live), used to offer a $5,000 line of credit to small business owners. All that was needed to get approved was a 680 credit score and an actively operating business that was at least 18 months old. Although 680 is considered on the higher side of credit scores, it still may not be enough to get a line of credit from a larger bank like Chase.
What about the small business owners whose personal credit scores fall below 680? That’s where Community Development Financial Institutions come in. The federal government created the “Community Development Financial Institutions Fund” to provide much needed funding for private banking and financial institutions to offer financial services, loans, and lines of credit to borrowers with less than perfect credit in low-income and financially distressed communities. The program is designed to stimulate business growth and job creation in these communities.
Community Development Financial Institutions Offer Microloans up to $250,000 to Small Business Startups
Here in Detroit we have organizations like Invest Detroit and Detroit Development Fund. These organizations provide small business loans, lines of credit and equity investments to business owners in the City of Detroit. These business owners can have credit scores as low as 500 (and sometimes there are no credit score requirements). Detroit is considered a low income community with a staggering poverty rate. The goal of most Community Development Financial Institutions is to help pull struggling communities out of poverty through business capitalization and job creation. You can search for Community Development Financial Institutions in your local area here.