Is bigger really better?

Rudy (skydiving pro), Rich, Mary, Doug Smith
Rich (left, after a tandem skydive) and Mary with small business owner Doug Smith
Mary Goodman

(MoneyWatch) Is bigger really better? That's like asking if a mega-resort is better than a bed-and-breakfast. Both can be great -- or awful. It all depends on what you are looking for.

The same is true with banks. But there's a twist -- with lenders, the issue of size has as much or more to do with what they are looking for than what you are looking for.

Of all the banks in the U.S., 92 percent are small banks. They are also called independent community banks and are defined by having less than $1 billion in assets. These small community banks account for 30 percent of all business loans under $1 million and 50 percent of all loans under $100,000.

According to the American Bankers Association, small businesses that approach small banks enjoy higher loan-approval ratings than those that go to big banks. Take two small business owners we know. Within the last two months, each received highly complex loans from small banks in their communities. Doug Smith of PROskydiving received a seven-figure loan from Resource Bank of Illinois. Brian Peters of Red Carpet Tickets in Austin, Texas, got a substantial line of credit from Plains Capital after the large bank he was working with would not renew his line of credit (LOC).

By thinking small and shopping local, Brian was able to obtain a new line of credit that was considerably larger than the LOC he had with the larger bank.

If you're like Brian, a typical small business, you are already banking at an institution when you decide to seek financing. Although a long-term banking relationship is helpful in general, it doesn't guarantee that you will be approved for a loan, that your current loan will be renewed, or that you will receive competitive loan rates and terms if you get the loan.

When you prepare to present a loan package to your current bank, don't stop there. Shop around and consider other lenders. Look at the little bank down the street, as well as the big one downtown. In fact, it may be smarter to look at all the smaller banks in your area.

There are various issues, products, and services that will tip the scales in determining the best fit for you -- be it large or small.

Here are six reasons why you should consider working with a small community bank.

1. Lending decision authority. Large banks have many more layers between the loan officer who takes your application and the ultimate decision-makers. Smaller banks generally have local decision-making authority, and there are fewer layers between the banker and the loan decision.

2. Relationship lending. Larger banks tend to engage in "transactional lending" based on credit scoring and other "hard" data. Smaller banks are more likely to make lending decisions based on their relationship with the businesses and how those businesses will impact the local economy. According to Resource Bank loan officer Dave Maroo, Doug's loan was predicated on the fact that he had watched the business grow, as well as seen Doug mature as a businessman for nearly a decade.

3. Networking opportunities. Small community or regional banks can usually offer contacts and industry-specific referrals that can be invaluable.

4. Affected by global economic crisis. Large lenders tend to be more affected and are less likely to lend during these periods. The financial crisis in Europe will have negative affects on many larger banks. Small and midsize banks are affected less because their focus is primarily on their local economy.

5. You can count on me. According to financial blogger The Wall Street Flaneur, following a banking crisis "it is the community and regional banks, those that understand the fundamentals of banking, the blocking and tackling, that are set to grow and prosper over the coming years." The giants will be hamstrung with capital requirements and new regulatory expense that will affect lending.

6. Buyer beware. Moody's Investors Service on Thursday lowered the credit rating of 15 major banks, including Bank of America (BAC), Citigroup (C), Goldman Sachs (GS), JPMorgan Chase (JPM), and Morgan Stanley (MS). The ratings agency had been reviewing large U.S. banks for a possible downgrade since February as part of a broader review of the capital markets. Investors have been expecting the move for months.

Last year, 92 banks failed. As of June 19 of this year, Zacks reports that 31 banks have failed. At this pace, we can expect about 70 more to fail before the end of this year. Do your own due diligence on any bank you're seriously considering. If you're not sure how to do that, check out our post 10 Questions to Find the Right Bank For Your Business.

We recommend that you do your homework and shop 'til you drop. But there is one thing that is becoming increasingly clear in today's market: Thinking small can bring big returns.

Mary's and Rich's book "How to Make Banks Compete to Lend you Money" can be purchased on