Small businesses needing loans should think small — bankwise, that is.
That's the finding of a new Internet tool that grades banks on their small-business lending.
Banking Grades, which measures loans in relation to deposits, gives As and Bs to many community banks but Ds or worse to some banking behemoths.
In Maryland, for instance, M&T Bank received a C — one of the best grades for a larger bank — while SunTrust and PNC received Ds. Bank of America got an F. Ouch!
Meanwhile, lesser-known, smaller banks are taking home As. Those include the Harbor Bank of Maryland in Baltimore, Howard Bank in Ellicott City, Revere Bank in Anne Arundel County and Woodsboro Bank in Frederick County.
The big banks' reaction is not unlike that of a high school overachiever who for the first time doesn't get an A. They claim the grading system is unfair, and some even question the motives of the tool's creator.
But academics who work with small businesses say Banking Grades' results aren't surprising. Community banks often do a better job of lending to small businesses, they say, especially when it comes to modest loans that aren't cost-effective for the big players to make.
And really, should banks complain about being graded? After all, they use credit scores to grade customers.
Banks "are very happy to do it to someone else, as long as it's not done to them," says Ira Davidson, director of the Pace University Small Business Development Center in New York.
At the very least, Banking Grades can be a useful resource to help prospective borrowers find lenders.
"From that perspective, this thing is gold," says Roger Staiger, an adjunct professor at Johns Hopkins Carey Business School. "This could be a great source of learning about local funding."
Banking Grades' creator is Ami Kassar, chief executive of Pennsylvania-based MultiFunding, a broker that helps small businesses line up loans. Kassar also is a regular contributor to The New York Times' small-business blog.
"I'm creating a tool to help small businesses know where they are most likely to get a loan," Kassar says.
Banks issue their own small-business lending scorecards, but Kassar says these include loans made to businesses with up to $20 million in annual revenues. Those can include companies with hundreds of employees, Kassar says — hardly the mom-and-pop enterprises most of us think of when we hear "small business."
Banking Grades uses the Federal Deposit Insurance Corp.'s definition of a small-business loan — an amount up to $1 million. The site then compares the total value of these loans with the bank's domestic deposits.
Banks on average use about 7.6 percent of their deposits to make small-business loans, Kassar says.
So banks that devote 6 percent to 10 percent of their deposits for small-business loans receive a C from Banking Grades. To get an A, a bank must use 25 percent or more of its deposits for such loans. Banks that lend less than 3 percent of deposits receive an F.
Banking Grades uses national data, although you can plug in your city or county at bankinggrades.com to check lenders in your area. More than 70 percent of the thousands of banks listed on the website have As or Bs, Kassar says.
Big industry players blast Kassar's methodology, pointing out that many small businesses borrow more than $1 million and those loans aren't counted. And, they claim, institutions with huge deposits would be hard-pressed to get a good grade.
"The math is flawed," says Scott Talbott, vice president for government affairs for the Financial Services Roundtable, which represents big banks. He adds that big banks last year committed to increasing small-business lending by $20 billion over three years.
But Kassar counters that the whole idea of a bank is to collect deposits and then lend that money to businesses to create jobs.
He says smaller banks tend to have an edge because the decision-making is done locally, rather than by layers of people in far-flung states.
He praises M&T for empowering its employees to make decisions locally, and says the lender is the best of all the big banks.
M&T, which missed getting a B by less than one percentage point, isn't mollified. It points out that it made nearly 7,500 new small-business loans last year and recently was named the top Small Business Administration lender in the Baltimore district.
Other big banks defend their records, too.
Bank of America says that in Maryland alone it doubled the dollar amount of new small-business loans in the first four months of this year compared with last year. PNC says its small-business loans nationwide reached $4.1 billion last year. And SunTrust says it's committed to small-business lending.
But Howard Bank CEO Mary Ann Scully says Banking Grades' formula is a good proxy for small-business lending. Howard received an A for lending nearly 36 percent of its deposits to small businesses.
"Most regulators will tell you that it's not easy to lend money to small companies and that the small banks do the best job of really getting to know businesses so they can safely underwrite that," she says.
Small-business owners, you now have a new tool in your arsenal when hunting for a loan or credit.
Kassar's advice on using his website: "Start at the top of the best-ranked in your community and work your way down."