Everyone has read about the number of bank failures over the past couple years. In fact, Georgia leads the nation in bank failures, so we know it well locally (my company bank, Georgian Bank, was one of the ones that failed). Lately, I’ve noticed a trend: three EO members that I know are part owners and on the board of local community banks.
I’ve mentioned before that banks aren’t in the business of loaning money when you don’t need it or when you don’t have hard assets to use as collateral. With this in mind it makes good sense why several of my friends are investors in banks:
- They have million dollar plus companies, so keeping their desirable accounts at the bank they invest in helps the bank
- They know lots of people and can refer them to their bank
- They encounter opportunities where they need access to capital and I’m sure being part owner helps with the loan process
I also talked to an entrepreneur that had sold his company to another entrepreneur where the entrepreneur that bought the company also owned a bank, and that played a role in the transaction. The reason it played a role is that the business was a good cash flow, 100% recurring revenue business. Because of the industry and structure of the business, partners in the future would buy into the business, get financing from the bank that was owned by the entrepreneur that also owned the business. Banks can borrow money from the fed at next to nothing right now. Owning a bank that can borrow money at next to nothing, loan it to a business partner that is buying into a business you also own at a standard rate (say prime plus 2%), and making money even if the new business partner walks away, seems like a pretty shrewd operation.
What else am I missing? Why are there so many community banks?
David Cummings on Startups 