As someone who’s still relatively new to community development, prior to sitting in on a panel for lenders, I assumed that bank lending practices were solely driven by the bottom line. On February 24th, 2014, the Federal Reserve Bank of San Francisco hosted a Small Business Administration (SBA) Lender Training in partnership with the Bay Area Association of Government Guaranteed Lenders (BAAGGL), and what I saw and heard about small business lenders challenged that assumption. What struck me most was that these bankers truly feel that relationship building is paramount and integral to their business model. They see each person who walks in the door as an important member of the communities they serve and see an opportunity to impact neighborhood businesses outside of a formal lender-client exchange.
For various reasons such as not enough business history or insufficient collateral, bankers may not be able to close a loan. However they still want to be responsive and remain involved in the development of a small business from the beginning, seeing themselves as key players in building community. Just because the bank can’t provide a loan at that time, it doesn’t mean the door is closed and the conversation stops. Often, bankers still seek ways to assist a small business as the opportunity to informally guide them allows the relationship to grow. Lenders may offer advice and other resources that would allow them to get a loan from alternative lenders such as Community Development Financial Institutions (CDFIs) as well as the network of technical assistance providers such as the SBA, local government, and other entities.
Why would the lenders make these connections that would result in no profits to the bank? Besides a commitment to community, lenders also see that maintaining ties and seeing businesses flourish could eventually result in a conventional or guaranteed loan with their bank in the future. They can also expect refer-backs from the alternative lenders.
At the training, a panelist from Opportunity Fund, a non-bank CDFI offering micro-loans, shared the story of Outerlands Café, which went to them for a $10,000 loan in 2008. If you live in San Francisco, you may know the Outerlands Café as a small neighborhood café that always has a seemingly endless line down the block. After the business grew which allowed it to pay off not one, but two loans from the Opportunity Fund, the café was referred back to a large national bank for a conventional loan, allowing them to consolidate and expand!
On a smaller scale, Kiva Zip offers microloans starting at only $5 through a peer-to-peer lending online platform. While not financially liable for the loans, individuals and organizations can become Kiva Zip Trustees, where they vouch for a borrower, putting their own reputation on the line. Lenders and even potentially financial institutions can become trustees and support entrepreneurs that they believe in, right there in their community without their direct bank support. Beyond financial support, backers and trustees armed with years of experience often share much needed technical advice and guidance.
Many bankers will continue to build long-term relationships and educate borrowers about options, even if the financial products borrowers are seeking are not offered at their financial institutions. This relationship building is not part of the bottom line, but it is a part of the small business lenders’ practices.