ACRHIVE: Shooting Yourself in the Foot- Reflections on the Banking Industry

his article was originally published on January 28th 2014 and may reflect a different time in our business cycle at The Milton Schoolhouse.

In April 2013, Joel and I made the decision to move our business banking from Chase to Carrollton. In hindsight I’m sheepish to admit the most influential reason for choosing Carrollton was how strongly it has promoted itself as a hometown, small business oriented establishment. “Enjoy a long term relationship with a seasoned banker”, their website proclaims, “You don’t have to repeatedly start from scratch with new bankers….We follow through on our promises, do what’s right.”

We were tired of being lead around from banker to banker by Chase, and decided it was time to support a local business with our business. Last spring we met with one of their bankers in Springfield, IL seeking a business line of credit. Unfortunately in the banking realm, most of our work here has been completed with cash and without debt- so our business had no credit of which to speak. I was told if I locked $15,000 of our funds into a CD at their bank, they would give us a very low interest line of credit of the same amount to build credit for our business. That way, when we looked to expand, we’d have something to show as a basis of lending.

Then came Maeva’s Coffee. After a year of research, planning, and market analysis (as well as an incredibly strong showing of support from our community- bravo!) it was time to put the plan into action. While we had the means to self-fund the coffee shop, we realized that in a service business- with vendors and planned future expansions- it was time to acquired credit for Maeva’s as well. On January 16th, Joel and I went into Carrollton with an extensive cost and market analysis of Maeva’s, looking to borrow in part or in whole our start up funds.

Our first problem was…well…our banker was no longer there. After purposefully establishing a relationship with a banker for our business, our banker had left the bank the week prior. The relationship we built with updates on our expansions last summer, the borrowing and paying back of funds, and the efforts to familiarize someone with the huge scope of our project and potential were lost. We met instead with the bank’s regional president and branch manager. They were cool to our plan, but I realized we had given them quite a bit of information. A decent sized business plan is difficult to review in the course of a single one-hour meeting. We left on “let’s look over it a little more and talk later” terms.

I left a message the next week- which was returned promptly by the regional president. I’m highly doubtful he read our research as he spent much of the call talking about how coffee shops were high risk as a whole, how he has a friend who was a “good seasoned” business man who failed in a coffee shop venture in Jacksonville, and how he felt obligated to inform me of the risk. All gleaning aside of whether his rather paternal poo-pooing would have happened had I been an older man, I was left shocked when he said that Carrollton would not loan us a single dollar unsecured. The great news was that, if I wanted to, I could take $60,000 of our own money and put it into a .4% CD- and then they could lend it back to me at 4-5%. Now, I may not be the brightest crayon in the box, but taking $60,000 out of a fund that is earning 9%, putting it into a .4% CD to borrow it back at 4% sounds like a pretty silly move.

I hung up the phone feeling irritated. Slightly betrayed I had so blindly believed this small bank was going to be different, somehow, than the larger bank we had worked with for three years. After relating our story to my close business friends, I had the terrifying realization that our experience was not an outlier- but a common secretive sign of a virulent problem in the traditional lending industry.

As heavy into the field of marketing as I am, I am keen to the signs of a business’ health reflected in their branding. I stress often to my clients that your marketing choices are meant to put your best face forward. While your advertising never shows the areas in which you are lacking, what it does show must be honest to be successful. If good marketing is essentially a reflection of the best part of yourself- Carrollton Bank has made a grave mistake in emphasizing their role in providing capital to small businesses. As we left their branch in Springfield, two well-printed posters of happy business customers endorsing Carrollton’s helpfulness were perched on displays near the door. The whole meeting felt much like showing up to a first date- only to realize the person you were meeting had used someone else’s photos for their profile. It is only a matter of time before other entrepreneurs who leave similar meetings, perplexed by the dual nature of the bank, discover they are not alone. Marketing that is not representative of your business operation is the first step to the gallows- and it’s a step traditional lenders appear to be making across the industry.

Unfortunately, the choice of traditional lenders to cut small business lending from their market is not a quick and painless death to choose. I predict a slow decline that takes its toll by putting a halt to start ups, inhibiting the expansion of current small businesses, and negatively affecting the job market for communities like Alton. Banks still maintain the advantage over crowd funding in their swiftness- and an advantage over alternative lending sources in their ability to borrow money at 0% from their depositors to lend out at attractively lower interest rates.

While banks have been tightening requirements for lending since 2008, small business owners still suffer in a lack of education to this change. Misinformation is to blame for part of this. When home town banks insist on making “small business friendly” the core of their brand and the reality of their practices do not align with their message, entrepreneurs faced with the already massive hurdles of beginning or maintaining a business walk away confused and discouraged. Meanwhile, institutions of higher education have turned a blind eye to this problem of capital. Like teaching dark room techniques in a world gone digital, universities continue to teach traditional funding as the primary form of financing a new venture. The truth is crippling to young and eager entrepreneurs- a good idea, a boot straps spirit, and a well-prepared business plan are no longer enough to acquire a loan in today’s America.  

I fully agree it is a bank’s choice to lend or not to lend, to make decisions best for their own business and clients. However, when a bank chooses to take no risk by lending only to “A-credit” small businesses- they are not only endangering the economic growth of a community, they are endangering the longevity of their own model. Offering to lend money only to those enterprises who do not need it inhibits growth on all fronts. Fortunately, the entrepreneurial spirit is a difficult one to kill. Inventors, business owners, and artists are seeking alternative forms of funding at a rapid rate- the industry of peer-to-peer lending is growing. It hasn’t yet reached the height to be a sole viable option for a typical brick and mortar start up, but the truth is that people are finding ways to profit from their talents and passions while cutting the bank out.

If smaller players in the banking industry wish to survive- or even become the new standard- in this environment change, they need to take advantage of their “home town” status. This means not broadly categorizing ventures into levels of risk and deciding whether or not to provide financing from the comfort of an office. They will need to hire bankers who behave more like investors or adventure capitalists, who can take a portion of the banks funds and discover how to grow these funds for their company. Small banks can no longer afford the “old boys”- they need people who will take the time to analyze each individual request, to consider all of the information presented, to visit the location and make an independent calculation. By hiring bankers at the ground level who are able to evaluate risk in a micro environment, banks like Carrollton can continue to grow.

It is disappointing to see them instead choose to wade in the wake of larger competitors over following the spirit of their marketing to make a real impact in the economic growth of their community. But, as Andrew Papageorge said, “Innovation is not absolutely necessary….but then neither is survival.”

This experience has been a very compelling one- so I don’t count it as a bad overall. Maeva’s Coffee has started construction on schedule and we are fortunate this has in no way affected our progress. However, it has reinforced to me the importance of taking small business into our own hands- together, as a community. Inspired by these events, I have begun to put together a class on crowd funding (using sources such as Kickstarter and Indigogo) to take place in Maeva’s this coming July. If you are an entrepreneur, small business owner, or artist, I want to give you the biggest round of applause. You aren’t alone. Our support comes from our neighbors, from our friends, and from our families- not from an industry that has become too blind to see how essential you are to their survival.