Banking Grades is an Internet-based tool that grades banks — big and small — on their small business lending record. The results are graded just like a school report card, with an “A” being at the top and an “F” at the bottom.
While the tool is great to help you on a local level when searching for a bank to pitch your business to, it also shows a growing trend: Big banks aren’t as willing to lend as smaller, community banks when it comes to small business. In Maryland, Bank of America received an F, while lesser-known banks like Harbor Bank of Maryland in Baltimore and Howard Bank in Ellicott City earned an A.
Banking Grades has come under fire from those larger banks, calling the system unfair (although, don’t banks grade us using a credit score?), but the results do make sense. It’s not cost effective for a big bank to lend a modest loan, but that’s the perfect type of loan for a smaller bank engrained in a local community. The goal of the tool is simple: “I’m creating a tool to help small businesses know where they are most likely to get a loan,” said Ami Kassar, the creator of Banking Grades.
So how does it work? Banking Grades uses the Federal Deposit Insurance Corp.’s definition of a small-business loan — A loan up to $1 million. Then the site compares the total value of these loans with the bank’s domestic deposits. On average, banks use about 7.6 percent of their deposits to make small-business loans.
Why are big banks getting such a low grade? Because little loans are a pain for them. Take Patricia and Jim McGrath for example. The couple owns a preschool in Santa Monica, Calif. They recently want to expand their school and needed to take out a loan. They have excellent credit, had enough money for a down payment and their school has always had a waiting list. They are a shoo-in to be accepted for a loan.
But they went to a larger bank and applied because that’s where they have done their banking. They were turned down.
“I was shocked,” Patricia McGrath told NPR. “I couldn’t understand why they wouldn’t be willing to give us a loan. It didn’t make any sense to me.”
Small business loans are some of the riskiest a bank can make, which is why big banks are hesitant about giving the stamp of approval. They’re also complicated to figure out. Most of the time, the owner runs a small, Main Street-type of shop. Compare that to a business that wants to take out a $30 million loan and has hundreds of employees. That larger company may be more organized, plus a loan of that size means more money for the big bank.
That’s why it’s always smarter to pitch your business to a smaller, community bank. The banking officer and the credit officer sit in the same office together and the banking officer working with the small business owner takes his or her case to the credit committee and pitches their loan. There’s little room for error.