Why Are Community Banks Disappearing, and Why Should Small Business Owners Care?

Over the past 20 years, the number of banks serving American communities has fallen dramatically, and that matters for small business owners.

FDIC historical data shows there were 8,833 FDIC-insured institutions in 2005. By mid-2025, that number had fallen to 4,421, nearly a 50% decline. Consolidation, mergers and an especially sharp slowdown in the formation of new banks have all contributed to a banking landscape with fewer institutions.

Why does the decline of community banking matter to small businesses?

Small businesses often need something that cannot be captured entirely by an algorithm: a banker who understands the business, its history, its market and the people behind it.

The FDIC found that small banks are more likely to use relationship-based information when evaluating small business loans. About 90% of small banks typically provide applicants an opportunity to meet with someone who has actual loan decision-making authority.

That relationship can make a measurable difference.

According to the Federal Reserve’s 2025 Small Business Credit Survey, businesses seeking financing from small banks were more likely to receive full approval than applicants using other types of lenders. In 2024, 54% of small-bank applicants received all the financing they sought.

Why should small business owners bank locally?

Choosing a locally owned community bank helps preserve a banking model built around relationships, local knowledge and access to decision-makers.

For a small business owner, that relationship can become especially valuable when it is time to purchase equipment, manage seasonal cash flow, expand a facility, acquire another business or navigate an unexpected challenge.

Community banks cannot remain part of our communities without customers choosing to use them.

If you believe locally owned businesses make communities stronger, consider applying that same philosophy to where you bank. Moving your business deposits, lending relationships and everyday banking to a locally owned community bank is one tangible way to support the financial institutions that continue supporting local businesses.

At Bank Michigan, we’ve been supporting local businesses and families since 1907. As banking choices continue to grow, we believe the relationship behind your bank still matters.

Better. Thinking. Banking. ™