The wrecking ball that hit the financial markets last week has left most of us scratching our heads wondering what will fall next. Credit unions, for the most part, stayed away from subprime loans so banks are taking most of the hits.
But a good deal of the damage to the financial industry is psychological both for consumers and practitioners. Financial decisions for both groups are an unlikely gumbo of numbers, reason and emotions. And during the bad times like last week, folks tend to retreat and pull in on initiatives. That’s an unwise strategy.
Since the Fed started tracking loan demand in the 1930s, there has been a continual loan demand for commercial lending—it has flattened, but never dipped even through downturns and mortgage meltdowns. An estimated 10% to 20% of members have a small business. If your credit union isn’t handling their small business needs, a local financial institution on the corner is.
Small business lending, for example, is still a golden opportunity for credit unions precisely because banks tend to ignore small businesses and their needs. And the nature and structure of credit unions are well suited to the needs of small businesses.
“Credit unions have the perception that small business lending is too expensive,” said Mike Hales, partner, the Rochdale Group, Overland Park, Kansas. “This isn’t a valid perception—the cost is inexpensive with the CUSO model, with seven or eight local credit unions it is most efficient.”
There are three options for credit unions to pursue in business lending and services said Hales. The first is to find a business banker and buy loan software and set up a business services department, which will cost approximately $400,000. The second is to subscribe to one of the national business lending CUSOs. The final choice is the regional approach where local credit unions come together to form a CUSO.
“I prefer the local approach, where you underwrite loans and make credit decisions where you live,” said Hales.
Local decision making results in safer loans, according to Hales. If you are physically close to your market you can get to know your borrower and assets intimately. There is also the ability to easily participate in loans.
“This allows credit unions to focus on deposit growth and fee income on the business side,” said Hales. “We can also offer business credit cards, merchant services, payroll processing and remote deposit capture.”
Hales has helped develop 12 multi-credit union owned member business lending CUSOs and is currently involved with developing a new CUSO, Innovative Business Solutions, LLC, in Columbia, South Carolina, which consists of 11 credit unions with an average asset size of $40 million to $60 million.
Generally, each credit union will make a commitment of up to $25,000 to pay the expenses of a consultant to help develop the CUSO and work with each credit union to design and offer business deposits and other business services.
Additionally each credit union will invest $100,000 to $150,000 to capitalize the CUSO. When the entity starts to earn money, the credit unions will get their capital back. There are usually three full staff members. When the CUSO starts to make money, the profits are passed through tax free to the credit union owners.
Any downside to this business model?
“Very little downside to small business lending,” he said. “The only downside is that credit unions lack the expertise, but they can hire the experts and learn from them.”
What do you think? What’s your view of credit union business lending and services? We’d appreciate your thoughts… please write a comment and let us know.