How One Loan May Impact an Entire Community

On the surface, a small business loan may look like a single transaction that takes place between a lender and a small-business owner. However, that single transaction has the potential to create a ripple effect throughout a community. When a local business has access to capital, that funding may help the company hire employees, purchase equipment, expand its operations, or invest in a new location. When this growth compounds, the effects may be felt by other businesses as well as households throughout the community.

Employees often spend their earnings locally, businesses purchase from other companies, and improved commercial spaces may attract additional customers and investment. For community-focused lenders, the impact of financing isn't measured only by the size of a loan. It's also measured by what that capital helps make possible. Find out more about how community lenders, such as Centrust Bank®, help make an impact on the community by providing Chicagoland small business owners with the capital that they need.

What happens when a local business gets access to capital?

At the most fundamental level, access to additional capital gives small businesses more options. After receiving a cash infusion, a company that has been constrained by limited cash flow may be able to purchase equipment, increase inventory, hire employees, or pursue an expansion opportunity that would have been impossible without that funding.

The long-term effects may be especially meaningful for businesses that serve a local customer base. When a business grows, it may create additional economic activity throughout the community. Its employees, suppliers, contractors, and customers may all become part of the broader impact of a small business getting the funds it needs to grow.

A growing business may create local jobs

One of the most notable community benefits of a business accessing capital is job creation. When a small business employs people, those people put the money they make back into the community. For instance, an individual who gets hired by a small business spends their wages at other local businesses, and their spending may allow other small businesses to hire more employees. They also pay taxes, which are used to improve local infrastructure.

Job creation may also strengthen the local talent pool. As businesses grow, employees may develop new skills and gain experience that may benefit them and other employers in the community over time.

More businesses may mean more local spending

No small business operates in isolation. The small retail store at the corner of a local street purchases products to sell and things for the store from other businesses. The café that you stop at every morning on your way to work buys things that it needs from other companies. When a local company grows, its spending may grow with it. A restaurant might purchase more from food distributors, a contractor might hire additional subcontractors, or a retailer might increase its inventory orders.

The interconnected nature of small businesses creates a multiplier effect. The original loan supports one business, but some of the capital may ultimately flow to other businesses and workers in the same community.

Business expansion improves a neighborhood’s commercial landscape

Getting access to capital may help businesses invest in their physical surroundings. A company may renovate an existing property, move into a larger space, or open a location in an area that needs additional commercial activity.

A well-maintained business district may make an area more appealing to customers, local residents, and other businesses. One successful expansion doesn't transform an entire neighborhood by itself, but multiple investments may contribute to a stronger commercial environment over time. For communities working to revitalize underused commercial areas, access to financing may be one piece of a larger economic development strategy.

Local businesses provide more than just jobs

In many cases, small businesses become part of the fabric of the communities they serve. They may sponsor local events, support charitable organizations, participate in community activities, or provide gathering places for residents.

Business owners may also have a direct stake in the long-term health of the communities they serve. Their success is often connected to the success of the neighborhoods where they operate. While financing doesn’t guarantee a small business will become part of the community fabric, it does give small businesses a chance to cement themselves as a vital part of the neighborhood.

Access to capital may close investment gaps

Ultimately, not every business has access to the same financial resources. Some small companies may struggle to build enough of a cash reserve to take advantage of growth opportunities, which makes outside funding so important.

Community-oriented lending may help address some of those gaps by connecting businesses with financing that fits their circumstances and goals. Local lenders may also have a deeper understanding of the markets they serve and the economic conditions affecting nearby businesses.

Relationship lending may strengthen more than a loan

Community-based lending is often about the relationship that forms between a lender and a small-business owner. A business owner who approaches a lender to ask about funding some new equipment may eventually go back when it’s time to expand. That relationship may give the lender a better understanding of the business's history, goals, and financial performance. It may also give the business owner a financial resource to turn to as the company's needs evolve.

Relationship-based lending goes beyond any single transaction. When a lender understands the local market and the small businesses that operate there, they may be better positioned to support economic activity while maintaining responsible lending standards.

One loan may create a ripple effect

The power of a single loan goes beyond providing a small business with the cash infusion it needs for a single growth opportunity. For example, a local manufacturer that obtains funding for some new equipment may also need to hire additional employees to use that equipment. As more products are produced, orders increase, creating the need for even more employees and, eventually, more equipment and inventory. Over time, those new employees start spending their money at other local companies.

The original financing still belongs to one business, but its economic effects may reach many others. The exact impact varies by business and community, but this illustrates why the value of business lending may not be able to be captured by looking at the borrower alone.

Measuring the impact of community lending

There are several ways to measure the impact of community lending. Lenders and economic development organizations may look at jobs created or retained, business growth, new locations, increased investment, and the amount of capital deployed in a particular market. However, qualitative metrics matter, too. A loan that helps a long-standing local business remain open, allows an entrepreneur to purchase a building, or supports the revitalization of an underused property may have effects that aren't immediately reflected in a financial statement.

Centrust Bank® is a community lender that has provided the funds that countless businesses in our area need. Find out if you pre-qualify today.

FAQs

How do small business loans benefit a community?

Small business loans may help companies invest in equipment, inventory, employees, locations, and other growth opportunities. Those investments create jobs, increase spending with local suppliers, and contribute to broader economic activity.

How does small business lending help the local economy?

Lending provides businesses with capital they may use to expand operations and invest in their communities. Growth may lead to additional hiring, increased purchases from suppliers, more commercial investment, and more local spending.

How do small businesses contribute to their communities?

Small businesses provide jobs, purchase goods and services from other businesses, and contribute to local tax bases. Many also support community organizations, sponsor events, and provide services that residents use regularly. This creates a ripple effect that expands far beyond a single business and benefits the community as a whole.

Why is access to capital important for small businesses?

Access to capital may help businesses manage cash flow, make investments, and pursue opportunities that they couldn't afford using available cash alone. Appropriate financing may also provide businesses with more flexibility when facing large expenses or experiencing periods of growth.

How can community banks support local businesses?

Community banks may provide financing and relationship-based banking services to businesses in the markets they serve. By developing an understanding of local businesses and economic conditions, they may help qualified borrowers identify financing options that align with their needs while maintaining responsible lending practices.

What is the economic impact of small businesses in local communities?

Small businesses may contribute to local economies through employment, purchases from other businesses, investment in commercial property, and spending by owners and employees. The specific impact varies by business and community, but the interconnected nature of local economies means that one company's growth may benefit others.