Armanino Blog
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Consider a Community Bank for Your Next Loan

by Isaac Peace
December 18, 2018

Have you ever borrowed funds from a community bank? Real estate developers and owners often overlook this source of financing, but these lenders offer some distinct advantages for borrowers who understand what “homegrown” banks consider when making lending decisions.

Why community banks

Compared to many larger competitors, which frequently are part of mammoth corporations, community banks are local players with genuine ties to the communities where they operate. As such, they have an understanding of the regional market that branches of national banks based elsewhere usually can’t match. This usually translates into more personalized service.

Community banks generally also offer a quicker loan process, which can result in lower closing costs and processing fees. The ultimate decision maker typically is located on-premises, leading to a quicker turnaround on loan applications.

This accessibility, along with the personalized service, can provide greater flexibility, too. A community banker who knows you and your business might be willing to work with you to get around roadblocks where a national bank would simply reject the loan.

What they look for

That’s not to say that community banks aren’t selective or disciplined in their lending practices. Although they’re certainly motivated to attract bigger business clients and enhance their loan portfolios, they also take a fairly traditional approach to real estate loans.

Thus, they look for lower loan-to-value ratios, established debt service capability, recourse debt and successful project execution track records. Community banks also like to see presales, where appropriate, and borrowers with some equity in the project. And, as always, project location matters.

What about lending limits?

One reason some borrowers have bypassed community banks in the past is concern that such institutions can’t satisfy their projects’ total funding requirements. It’s a valid issue—federal and state regulations or internal policies can limit the amounts that some community banks can lend to a single borrower. However, the banks have options to help them meet borrowers’ needs while still complying with these lending limits.

Community banks will often share lending risk through a loan participation or syndication arrangement. With a participation agreement, one bank originates the loan with the borrower and then sells part of that loan to one or more other banks. In a syndication arrangement, multiple banks jointly make a loan to the borrower. Both approaches allow borrowers to enjoy the benefits associated with community banks while securing funding otherwise available only from a large, impersonal institution.

Think outside the box

It’s easy to pursue financing options that you’ve used in the past. However, alternatives like community banks may lower your costs and provide better service than you’d receive from a large national bank.

December 18, 2018

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