Community Banking: Navigating a Rapidly Changing World

Small business owners are facing a rapidly changing world. Staffing shortages, higher loan interest rates, cash flow deficiencies and fraudsters can threaten a company’s health, leading them to turn to their bankers for help.

Labor Shortage and Inflation

 At Equitable Bank, Community Bank President Doug Nodgaard noted how many of the bank’s small business clients have struggled to compete for talent.

“Sometimes small businesses can’t offer as good of employee benefits such as 401(k)’s and good health insurance, [so] there is a lot of turnover and time and money spent on training new employees,” he said.

Patrick Zach, vice president of commercial lending at Dundee Bank said that interest rates on loans and some deposit accounts have increased over the past year.

“Some business owners may elect to hold off on expanding their business or take on a new project due to the elevated interest rates,” Zach said. “Others are electing to sit on some of their cash, which is generating them some interest income in a money market account or a certificate of deposit.”

The main financial trend impacting all small businesses is pressure from inflation, according to Jeff Richardson, associate vice president and business banker at Centris Federal Credit Union. Specific challenges may vary from industry to industry, but costs across the board have made doing business more expensive.

“This also includes starting a new business,” he said. “Business owners have been required to be nimble and adjust their business plans to the new reality, which is strategically managing overhead expenses and ‘go forward’ pricing strategies.”

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According to Shane Kalin, vice president and commercial banker at Northwest Bank, disruption and unpredictability in the supply chain and the difficulty of securing adequate labor are two trends that most commonly affect small businesses.

“We have heard from multiple businesses that since 2020, they have seen rapid price changes from their suppliers,” he said. “In previous years, they might have seen two price changes in a year from suppliers. They are now seeing price changes monthly, bi-weekly, or even more rapidly.”

Along with the rapid price changes, customers are finding it difficult to get timely delivery of needed supplies. These delays along with the variability in the price of product is putting strain on working capital cycles as well as pressure to correctly price their products and services to make a reasonable profit.

“We have heard from many small businesses that they are staffed below their desired level and that they have put significant time and effort into hiring additional staff with little to no results to show for it,” Kalin said. “Some of our customers have stated that even a continued increase to their offering wage has not yielded additional candidates. With an inability to staff to their desired levels, some companies are having to turn down work, reduce hours they operate, or attempt to produce equivalent amounts with less labor.”

Essential Banking Needs

Fraud prevention is extremely important today. One of the fastest-growing threats to a company is business email compromise (BEC). This occurs when scammers use stolen credentials such as emails to impersonate a known employee, gaining trust to provide false payment information or a change in payment information.

Fraud prevention tools top the list of essential small banking needs, said Lindsay Borgeson, chief deposit officer at Core Bank.

“The best safeguard to prevent fraud is you and your employees,” she said. “With training, recognizing signs of suspicious activity can help prevent your funds from getting into the wrong hands.”

She advised firms to look for possible gaps that could open the business to risks of internal fraud, corporate account takeover, and business email compromise.

“Ask your bank what they can do to protect the business from these ever-evolving threats,” she said. “Outgoing and incoming payments can be made more efficiently through the use of banking tools. Seek solutions to expedite your cash flow cycle. Ensure excess balances are working for you, whether via earnings credit to offset bank fees or a sweep to an interest-bearing account.”

Nodgaard said small businesses should develop a good relationship with their banker.

“If you can’t call your bank and get a quick answer, then you as the business owner aren’t as efficient or effective,” he said.

Zach said small business owners will request services that fit their company’s needs, including small business loan options, an operating line of credit, an equipment loan, and/or a loan to purchase a property. Supplemental services for business deposit accounts include online and mobile banking, ACH services and remote check depositing.

“At the end of the day, business owners want to work with individuals who understand the needs of their business,” Zach said.

For businesses in all industries, it is essential to find a financial institution that can deliver products and services which will protect, integrate, and create efficiencies—not hurdles—for the business, Richardson said.

“Work with that banker to understand their current and future lending and deposit needs for the business,” he said. “This should be a process they should revisit frequently with their banker as their business grows, expands services and changes needs.”

Small businesses need the ability to move and track the movement of their money efficiently, according to Kalin. They need to be able to earn from their money while it is in the bank, and they need to have the ability to fund their initiatives in real estate, equipment, inventory, new business line offerings, marketing, and all other capital items.

“The products that banks deliver to solve these needs can be wide-ranging and can solve multiple of the needs or be tailored for a more specific need,” Kalin said.

All banks basically have the same products and services, according to Nodgaard.

“What we offer is our time, ability to listen and then, based on our expertise, offer advice and make suggestions,” he said. “Most business owners know their industry better than we do, but our lenders do have experience in most industries, and we share those experiences with our clients. Most of the time, clients are just looking for reassurance.”

“Our loan officers enjoy sitting down with business owners to walk through their business plans, review financial data and discuss options for helping them achieve their goals,” Zach said. “Our Treasury Services Department assists our small business customers with a full suite of deposit account products and support.”

Centris offers all types of commercial lending for businesses, including equipment, lines of credit, auto, credit cards, owner and non-owner-occupied commercial real estate and SBA [Small Business Administration] loans. The credit union also offers an online and mobile experience which pairs well with its continually expanding cash management services.

“Businesses should expect proactive solutions from their financial institutions,” Borgeson said. “Core Bank believes in an advisory approach and delivers annual relationship reviews to ensure we are delivering the best experience for our customers.”

The products Northwest Bank offers typically fall into one of three categories: depository accounts, loan products, and money-moving/tracking products.

“For depository accounts, the overarching goal in deciding what accounts to place customers in is to minimize fees, maximize earning potential, simplify accounting, and to maximize FDIC insurance protection and other protections available,” Kalin said. “Our loan products are tailored to the need the customer has for funding. [We have] products focused on tracking the funds you have with the bank and efficiently moving them for the purposes you need.”

“I’d like for the small business owners to think about where they put their deposits,” Nodgaard said. “They might get an extra .25% at an online bank, but does that online bank reinvest [in loans] in the community that they do business in?” 

Threat of Bank Failures

In view of the recent collapse of some larger banks, should community banks and their customers be worried?

“In Nebraska we are fortunate to enjoy a diverse and healthy economy,” Zach said. “Community banks in Nebraska remain well capitalized and for the most part do not have any exposure to some of the more volatile industries, such as cryptocurrencies.”

“I believe these recent occurrences give community financial institutions the opportunity to highlight their current financial strength and stability in the markets they serve,” Richardson said.

Kalin believes that the banking community in the Midwest is less susceptible to the issues that caused the recent bank collapses.

“For the most part, the customer base of Midwest banks is wide-ranging and in diverse industries,” he said. “Midwest banks have a higher percentage of FDIC insured deposits of their total deposit base than some of the banks that recently failed.”

 The biggest effect from bank collapses, he believes, is a customer move to evaluate their FDIC insurance coverage and a determination on good risk mitigation plans for any of their funds that aren’t covered by FDIC insurance.

“I believe we could see some bank regulation change based on the recent bank failures, but I don’t believe that is going to be a difficult hurdle for Midwest banks to adapt to,” Kalin said. “I have a great deal of confidence in the quality of operation of individual institutions and quality of banking overall that we have within our area.”

Although the possibility of increased regulation may be a concern for community banks, they are well-positioned to weather any storm, according to Borgeson. She suggested that business owners call their bankers and ask what they may have in place to provide additional coverage. For instance, do they offer products that can fully insure funds over the FDIC-insured limit?

“Ultimately community banks are built on relationships and emphasize supporting the businesses in the communities they serve which truly is the fabric of a thriving economy,” Borgeson said.