By Karen Axelton
When the Great Recession struck in 2008, among the first casualties were small business owners whose loans were called in by big banks—often despite having a great credit rating and making every loan payment on time. Smaller, community banks quickly emerged as saviors. In 2010, 73 percent of small businesses using small banks got the credit they wanted, compared to just 48 percent of those using a large bank, a recent report by the National Federation of Independent Business showed.
But now, smaller banks small businesses have come to rely on are increasingly in jeopardy, as big banks are snapping up smaller ones in mergers and acquisitions. According to a recent report by CFO Magazine, the consolidation shows no signs of slowing. Due to a combination of acquisition and failure, the number of small banks has been shrinking for the past 10 years, CFO reports, declining from 10,204 insured institutions in 2000 to 7,657 in 2010.
Do you need to be worried that your community bank is at risk of acquisition? So far, banks most likely to be bought are those that are in distress or have already failed. Being located in a region where the housing market is still struggling is also a warning sign, as many larger banks in these areas are seeking ways to make up the lost income from mortgage lending.
But as the economy improves, experts predict, even thriving community banks won’t be immune. And with regulatory and reporting burdens set to increase, thanks to the Dodd-Frank Wall Street Reform and Consumer Protection Act, smaller banks may have to get acquired by bigger ones just to get the resources they need to comply with all the paperwork.
What will it mean for you if a big bank buys your community bank? First, small business ability to get capital is likely to suffer. Although many large banks have in recent months announced new commitments to small business, larger banks are traditionally less flexible about lending decisions.
Lending isn’t the only area where small businesses could feel a financial pinch. Fee increases are likely to hurt as well. New consumer protections implemented last year under the CARD Act limit banks’ abilities to charge fees and penalties on consumer credit cards, so banks have made up the difference by raising service fees, credit card processing fees and business credit card fees.
What can you do to protect yourself? CFO recommends small businesses that are close to needing financing may want to seek it now. If you’re ready to switch banks, look for a new one structured to help it fight unwanted takeovers–mutual banks that are “owned” by their customers are one example. And over at BNet.com, Mary Goodman and Rich Rukassoff recommend establishing a relationship with a “backup bank” now. That way, you won’t be taken by surprise if your current bank gets bought out.
Image by Flickr user Nick Ares (Creative Commons)Google+