Small Business Lending Still Golden for Credit Unions

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.



7 Responses to “Small Business Lending Still Golden for Credit Unions”

  1. Mickey S. Moore

    I agree Jim, there is certainly opportunity within the small business market. Having worked in both industries (credit union and banking), I have seen the programs at different levels and have even had the opportunity to develop a sales culture or two.

    Your concern regarding the lack of expertise is pertinent. In today’s business banking world, most financial institutions are pretty much offering the same products, at about the same rates – as a result, the difference maker could be the actual relationship manager.

    It is not only important to have competitive products/rates and competent business bankers, but more importantly you have to have a relationship building process in place when it comes to the business services side of the house. Just selling products and services alone will not guarantee a relationship with a business owner – again, we are all selling pretty much the same products and/or promises of the best service.
    When considering your development of a business services program and serving your membership, you should focus on 3 key elements:
    * Identify
    * Plan
    * Execute
    Start with identifying the members (business owners) that you want to do business with, utilizing data, reports, lists, etc. Your plan should focus on a different question sequence centered on building a relationship with the business owner, to learn their story….not just sell a product. Finally, execute proactive face-to-face interactions with business owners.

    In order to achieve top line growth without sacrificing asset quality and margins, a proactive sales process must be in place and committed to from top to bottom of the organization.

  2. Katherine Weber

    We have also been involved with the formation of several member business lending CUSOs and I agree this is the way for credit unions to approach member business lending. It is not only an effective tool to allow credit unions to share in the cost of providing the service, but a CUSO also spreads the risk of the venture among the owners. It is a cost effective and conservative approach to offering a new service. A CUSO enables small and large credit unions alike to get in the action.

    I am a proponent of the local CUSO model. This is not to say the “national” CUSO does not work. It certainly does. However, I believe there must be a local presence to for successful commercial lending. So, whatever the choice, there must be a person knowledgeable on the local market and available to establish and maintain the member relationship. There is no replacement for the face-to-face relationship in the commercial lending arena. From an underwriting perspective, it is a smart way to gain an accurate perspective of the value of a company. From the member relationship angle, it provides the much needed personal touch to lending to small businesses. There is frequently more to know about a small business than what can be seen on paper alone.

    So many members are also small business owners. Many credit unions will find that what was thought to be a consumer loan is actually being used for a start up business. How many of your members are turning to their consumer credit cards to provide a line of credit for their businesses? If your credit union is not providing member business loans, you are not only missing out on an opportunity for additional income, but you may be failing to provide services your members are looking for. As a result, you may be loosing members. With so many members involved in some type of small business, doesn’t your credit union at least owe it to your members to consider the solutions available to offer members business lending?

  3. Jim Jerving

    Mickey and Katherine, Thank you for your comments. Most new ventures being created today are small businesses. And you’re right–many consumer and credit card loans are funding these businesses. Because of this, most credit unions are already serving small businesses. Credit unions are well positioned to serve the needs of small businesses in their communities via the local CUSO model.

  4. Mike Hales

    When I read reports that tout the fact that now nearly 25% of credit unions are making member business loans, yet 93% of the MBL portfolio is secured commercial real estate, I wonder what’s wrong with that picture? Commercial real estate loans are comparatively low-yield, long term investments. And while we all love brick-and-mortar collateral, we also need to focus on the short term capital needs of our member business owner clients and offer lines of credit, short term working capital loans, equipment and vehicle financing and other short term, higher yield credit facilities. But the opportunities don’t stop with lending.

    We also need to focus on requiring and monitoring compensating balances and the compelling deposit opportunities that member business services offer. The majority of small businesses maintain at least three checking accounts: an operating or general account, a payroll account, and a merchant account for credit card receivables. Herein lies a significant opportunity to reduce loan to share ratios.

    Fee income opportunties are also compelling. Small business owners will pay for transaction services, credit and debit card processing services, cash management services, trust and pension services and brokerage services.

    And the hottest item to come down the pike in years is remote deposit capture…a tool that immediately quashes the objection “your branch locations aren’t convenient” while at the same time providing an alternative to having to drive to the credit union and wait in a teller line. Remote deposit capture is clearly a win-win for both the member business owner and the credit union.

    The challenge is this: How can the Member Business Services CUSO network open the door for more credit unions to reap the benefits of Member Business Services?

  5. Rick Larson

    I am a small business and I use a credit union for my checking, saving and credit card. One of the first times I went to the credit union to make a deposit, they couldn’t locate my account. The reason? Someone had entered it in their computer system using some name other than my business name. After that, I knew I always needed to carry my account number with me when doing business with the CU. Also, while I can check my account on line, it doesn’t provide credit card information like my member account does. I can only check saving and checking. For credit card, I have to go to the credit card website, or call the credit union. That’s inconvenient. Fortunately, I’m loyal to the credit union, but if and when my business thrives, I may still have to change to a F.I. that’s more business savvy.

  6. Gene Hahn

    Hi All:

    I do believe that local credit unions need to expand in the small business area. The cooperative that I work for used to do all our banking with our local neighborhood credit union.

    That was 10 years ago, as we grew it became harder and harder to work with our local credit union. The main reason we had to go to a commercial bank was the credit unions inability to loan us 2 plus million for a business expansion. To get the commercial bank loan we had to transfer all our banking business to that commercial bank.

    I strongly support the creation of lending structures which would allow local credit unions the ability to lend to small business and small cooperatives in other sectors.

    The present situation with our commercial banking industry clearly indicates that we need to create and maintain small local credit unions serving local needs.

    As a final note, To big to fail means that the institution is to big. If we had only a few credit unions, and a few banks in existence, an argument could be made that they would be efficient. An alternate argument could be that our society would be at grave risk due to boneheaded moves by a few institutions.

    Keep up the good work.

    Gene Hahn

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