Community Development Companies (CDCs).
CDCs provide 40% of the SBA 504 owner-occupied real estate loan program financing to entities that qualify. This is mentioned here because the 504 program is an SBA-guaranteed loan program. The CDC funds 40%, the bank provides 50% of the financing, and the business Community banks or its owner typically contributes the remaining 10%. CDCs are regional (multi-state) or community-based (county or counties or state) development organizations licensed by the SBA. To view a list of CDCs in your area, go to the SBA website and search for the CDC member directory. CDCs make loans under the SBA 504 loan program to assist small businesses in acquiring or building owner-occupied real estate. The CDC processes, approves, and closes then loan. After closing, the CDC services the loan.
The SBA 504 program mandates the achievement of certain economic development requirements – typically job and income creation – through the use of its guarantees. Hence, CDCs, whose mission is tied to economic development, administer this program and lends to those businesses that help it achieve its objectives. Economic development and impact requirements vary by CDC. The CDC acts as the direct lender for the loan program and provides the funding through bond issuance.
These banks tend to be more aggressive than national banks in working with small businesses. They generally operate in one region of a state, hence the name “community” bank. They are small, nimble, and generally organized to serve the needs of their communities. Some focus on consumers in the community – providing consumer banking, loans, and mortgages. Others focus on business – providing loans for a number of businesses and projects.
Community banks have a much simpler structure than large conglomerate banks such as Bank of America, Wells Fargo, or Wachovia. They have deposits, loans, and perhaps money market accounts and CDs. They are usually hungry to build assets. A few cater to high net worth individuals but most pursue businesses as a means of building assets. Most corporations bank with the national conglomerates for a number of reasons. As a result, many community banks pursue small businesses and small business loans aggressively.
When to use community banks:
If you are a small business that primarily processes customer payments out of one location and are looking to establish or build upon a strong local presence or local relationships, community banks are for you. Find out the lending limits of the community banks in your area. The best scenario is to identify a community bank at which you can establish and build a relationship that grows as you grow. You may only need a $250,000 loan now, but in two years you may need a $2.5 Million loan. If your bank’s allowed loan size can grow with you, you have room to grow without needing to change banks.
To help build the relationship, you place your deposits with that bank. Make sure you update your banker periodically. The more they know about your business, the higher their comfort level, and the easier it is for you to increase your loan size or navigate financial problems should they arise.