As rural community banks chart their futures, they are challenged by economic and financial change. Today's rural communities are no longer isolated from global and national economic trends.

At the same time, many rural business are being drawn to urban centers where they can be closer to suppliers and customers. And, as the regulatory burden on banks continues to change, rural bankers are finding it harder to compete on their home turf.

Moreover, the economies of rural communities are being shaped by national and global economic trends. As a result, a rural location no longer provides a buffer against the ebb and flow of distant markets.

Global Challenge

Advances in technology, travel, communications, and financial markets have created a global marketplace for most goods and services, a marketplace that offers both incentives and challenges to rural economies.

Trade agreements also may have a disproportionate impact on rural communities. While the effects of the North American Free Trade Agreement cannot yet be adequately measured, some researchers suggest that the plants most likely to move as a result of the pact are concentrated in rural communities. At the same time, Nafta may give a boost to communities that depend on agricultural production.

Industrial Restructuring

Several key changes in the world's industrial sector are reshaping the way that rural businesses must operate to remain competitive. As the industrial structure of rural communities evolves, rural bankers must develop new tools to meet increased credit needs. And bankers must make difficult decisions about whether to lend to nontraditional businesses.

One key change occurring in the national economy is the shift away from goods-producing industries toward service-producing industries. In rural areas, goods producers and low-skill service sector activies still tend to predominate.

Small Businesses Gain

Attracting higher-wage, higher-skill producer services to rural communities will depend on a community's location, its quality of educational and job training resources, and its infrastructure investments, particularly in telecommunications.

Another key feature f industrial restructuring is the rising importance of the small-business sector. Small businesses are producing more jobs and greater economic diversity, particularly in rural economies.

In an era of globalization and industrial restructuring, agglomeration economies take on heightened importance. Aglomeration economies refer to a concentration of related business activities in one place.

Recognizing the importance of agglomeration economies to local industries may help community bankers assess the potential viability of a business and the economic development consequences of such lending.

As rural economies undergo fundamental change, so does the financial services landscape. Banking deregulation, mergers, statewide branching, and interstate banking have dramatically altered the face of banking over the past 10 years -- particularly for isolated rural bankers.

They now must now compete for increasingly sophisticated customers with other local and nonlocal lenders.

No Guarantees

At the same time, advances in technology mean that proximity to customers no longer guarantees rural community banks their traditional deposit base. As a result, local deposits may prove insufficient, and gaining access to external funds may soon become critical to rural community banks.

Rural community banks are in a unique position to respond to the economic and financial changes sweeping rural America and the financial services industry.

No one knows the local rural economy better than the community banker. And, while deregulation has raised the specter of large banks entering rural markets, the reality is that most communities remain dependent on the community bank to finance their futures.

Thus, rural community bankers and businesses must work together to respond to a rapidly changing economic and financial environment. In many cases, the future of both the bank and the community is on the line.

Fostering Development

Community bankers can use several strategies to improve growth prospects for themselves and their communities. Rural community banks should, of course, continue their traditional role of lending to local businesses.

But equally important, community bankers have special knowledge and skills that can be deployed more broadly to foster economic development. Banks can help find the capital -- both debt and equity capital -- that businesses need to modernize and remain competitive.

Banks can also offer financial expertise to rural entrepreneurs who need help in starting small businesses. They can serve as an information link about credit and other programs available to encourage business development and economic growth. And, rural community bankers can provide leadership to help the community develop a vision for adapting to economic change.

Limited Capital

To meet the challenges ahead, rural communities and businesses must have access to capital. Rural communities need capital to support business startups and expansions, and rural businesses need capital to modernize and remain competitive. While community bankers are the primary source of debt capial for local businesses, the ability of banks to meet new demands for capital may be limited for two reasons.

One, traditional finanical institutions continue tobe constrained from providing equity capital. For start-up enterprises and expanding industries, future capital needs may be for equity-like capital rather than debt.

Two, regulated community bankers must always be sensitive to the risk involved in lending activities. As such, lending to support community economic growth may involve loans with limited or nontraditional collateral, loans to new enterprises with limited business experience, or loans to existing firms that want to expand into new markets. This type of lending requires increased innovation by community bankers.

Forming Partnerships

To meet the capital needs of local entrepreneurs, community bankers can form partnerships with other private and public entities. These partnerships can be forged with public-sector institutions, such as state development finance programs, with private sector community development institutions, or with alternative financial institutions.

These partnerships are necessary to pool limited resources and leverage funds to support economic growth. These relationships are also helpful in allowing banks to become more involved in financing local economic activities without incurring unacceptable levels of risk. Not only are funds pooled through these partnerships but risk is shared as well.

Two prime examples show how partnerships can help banks provide access to new sources of debt capital to support community economic activities. Community bankers in Michigan are able to make moderately risky business loans through their participation in the Capital Access Program, an insurance pool funded by state programs, private lenders, and borrowers.

Program in Illinois

Most of these bankes are making business loans that would not be made without the program. And in Illinois, community bankers can make loans to small businesses, including women-owned and minority-owned businesses, in partnership with a state lending program. Banks can also make loans to individuals, with state funds serving as a second mortgage for the borrower.

Access to equity-like capital is considerably more limited in rural communities. Community bankers, however, can develop partnerships with alternative financial institutions.

For example, banks in North Carolina purchased stock to capitalize an alternative financial institution that provides debt and equity-like financing to businesses.

A Valuable Resource

Community bankers have more than capital to offer a potentential business borrower. The banker's financial expertise is another important resource to rural enterpreneurs since access to business assistance services in rural communities can be difficult.

Yet, several surveys suggest that many smaller firms feel they are not being served by their local bank or are unaware of services offered.

Community bankers must be more focused on reaching out to the small-business community and playing an active role in local economic development.

Small businesses represent a continuing experiment by individuals who think they have an idea the market will support. Often these ideas require serious revisions. While experienced business managers can anticipate potential financial pitfalls, new business managers or owners may not.

Management Counseling

The commnunity bank can play a crucial role during the business formation process, therefore, by increasing acces to management counseling and support.

Many private, nonprofit community development corporations also provide business assistance. Local bankers can work with these technical assistance providers, outlining the bank's lending criteria, discussing necessary financial documentation, and referring potential borrowers to other professional advisers, such as marketing consultants.

Having a local economic development organization share in these costs reduces the costs of making small-business loans.

New economic realities are signaling that the days of passive community banking are over. Bankers must aggressively identify entrepreneurs, encourage and prod community leadership in the pursuit of economic growth, and support economic development activities.

Strategies for Change

Successfuly communities develop comprehensive strategies for guiding economic changes. Community bankers have an important role to play in formulating and implementing these strategies. Bankers can engage community groups in determining how the bank can respond to emerging community needs.

Bankers can lend needed financial expertise in support of economic development endeavors and make prudent lending decisions in support of communities economic change. Communities need to identify the internal investment opportunites that are necessary for successfully adapting to economic change.

In turn, community bankers must weight the potential returns from making short-trerm investments outside the community against the need for supporting the long-term investments indentified as being necessary for growth within the community.

Community bankers in Wisconsin are active participants in the University of Wisconsin-Extension's Communtiy Economic Analysis program, which seeks to help communities build economic development strategies.

Their participation involves contributing to the discussion of major issues facing the conmunity, building strategies to address priority issues, and supporting implementation efforts that often require bank personnel and expertise rather than bank financing.

Information Clearing House

One particularly important way rural banks can demonstrate leadership in their communities is by relaying information. In most cases, the local bank is the first stop for a business needing capital for start-up, expansion, or modernization.

Bankers can serve as an information link for these enterprises by maintaining information about state development finance programs, equity investors in the state or region, technical assistance providers, university or state industry modernization programs, and other relevant business assistance providers.

For example, bankers in Texas actively refer small businesses to the business assistance resources at the Business School at Pan American University. The small business can receive assistance in preparing business plans, evaluating financing needs, and preparing the financial doccments necessary to apply for a bank loan.

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