CUs Remain Consistent in Need for Proof of Collateral, Cash Flow in MBLs
According to an Intuit small business report of 35 credit unions and other lenders with assets from $2 million to $6 billion, most are actively seeking to provide credit to small businesses. Still, lending standards remain as strict as they always have been. Nearly all said they continue to have stringent underwriting criteria for granting credit.
"Community banks and credit unions can be an excellent and accessible source of credit for small businesses who meet their lending criteria," said Steve King, co-author of the Intuit report and a partner at Emergent Research. "Unlike most large banks, these lenders traditionally steered clear of the creative financial products that now burden much of the financial services industry with large losses and toxic assets."
Lenders had mixed views on the Small Business Administration's loan programs, report data showed. Some found them lucrative while others said they were "a drain on their business" due to "burdensome" requirements and costs. Those credit unions and banks that said they established processes and procedures to handle the added requirement to service SBA loans indicated that they are fulfilling a need that other financial institutions have rejected. King said credit unions link up with member business lending CUSOs and third parties to have that SBA alliance.
While many small businesses rely heavily on consumer credit including personal credit cards and home equity loans to bankroll day-to-day operations, providers are starting to cut use of these financing alternatives. Lured by lower qualifying standards and fees, small businesses now owe roughly $150 billion on consumer credit cards, King said.
"But the lure is fading. The same factors that make conventional loans more difficult to obtain are forcing lenders to lower their exposure to consumer credit card risk," King noted. "They're slashing credit limits, raising interest rates and making it harder to qualify for credit cards."
The distinction that credit unions and community banks have is that they are more apt to hear a small business owner's growth plan, develop a relationship and respond to their needs even as banks retreat from serving this segment, King said. Unfortunately, some of the smaller players don't have the asset base to replace the larger lenders, he added. Even as credit unions and community banks continue to expand small business lending, credit availability will remain tight.
This is especially true of microbusinesses with fewer than five employees, King said. They may have the hardest time getting credit due to a lack of operating history, positive cash flow or collateral. For them, the alternative might be sticking with their existing banker relationship to prove they are viable businesses.
"The credit unions were saying, 'We're staying true to [our] traditional lending standards and requirements,'" King stated. "They wouldn't use the word 'aggressive.' What they were saying is, 'We still lend to quality borrowers.' They didn't want to go beyond their service or geographic area."