Scared of Your Bank? Small Biz Turns to Small Banks

If you own major bank stocks, recent headlines have you cringing:

Bank of America's(BAC Quote) 95% fourth-quarter profit drop, Citigroup's(C Quote) $10 billion loss in the fourth quarter of 2006, Washington Mutual's(WM Quote) $1.87 billion fourth-quarter loss, followed by rumors of an impending sale.

The subprime mortgage mess is taking a toll on the big financial players. Yet the small-business owners and the bank loans they count on to help them expand may be more in demand than ever.

Lost in the Shuffle

Small-business loans bring more than $100 billion in profits for banks, according to a recent report by the financial services group of McKinsey & Co. In addition, small-business owners are two-and-a-half times more profitable than the average retail consumer.

But so far, big banks haven't capitalized on the potential of small businesses.

As banks have gotten larger and harder to navigate through seemingly endless mergers and mass restructurings, the little guys -- with their relatively small loans -- get lost in the shuffle.

Found by the Locals

Tired of being overlooked, many business owners are turning to smaller, local banks.

The McKinsey study estimates that large banks have lost 2 percentage points of market share to small banks over the past three years.

Community banks -- generally, those with assets of $1 billion or less -- have been spared much of the subprime fallout.

"Community banks tend to be much more conservative ... [which] has kept them out of trouble," says Lynn Davis, president of Community Bank Consulting Services in St. Louis.

Typically, says Davis, community banks have been very small-business friendly. The current big bank troubles seem likely to exacerbate that trend.

"At big banks, the loan officers are constantly hunting for new business, because their incentives are based on loan growth," says Davis. "Community bankers have the time to cultivate the loans they already have. That's the kind of attention small-business owners need."

As large banks go through yet more rounds of layoffs and cost-cutting, small-business owners may be overlooked yet again -- and take their loans elsewhere.

The Small-Biz Snowball

For a bank, keeping a small-business owner happy can pay off far beyond the initial loan: Entrepreneurs who have good experience at a bank are more likely to transfer their personal and family accounts there.

They may refer vendors, suppliers and other professional contacts. And a business that keeps growing can bring in ever-higher revenue for years to come.

As Citigroup and Washington Mutual figure out how many thousands of employees to lay off, it's the small, under-the-radar community banks that may be financing the next great American businesses.