Perfect Time for More MBL Market Analysis
Honoring small business owners of the year, President Obama recently urged Congress to pass two major programs to increase lending to small businesses. "Government can't guarantee a company's success," the president said, "but it can knock down the barriers that prevent small business owners from getting loans or investing in the future."
Unfortunately, the president wasn't urging the knocking down of obstacles that limit the ability of the nation's 7,710 credit unions to make loans to small businesses. Indeed, unless lawmakers amend the bills, the two programs-one a $30 billion lending fund-won't even allow credit unions to participate. For instance, the House Financial Services Committee approved lending fund legislation, but it applies only to any community bank under $10 billion in assets.
Traditionally, to be sure, credit unions provide service primarily to individual consumers who become members. They underwrite mortgage, auto and consumer loans. But business lending has grown substantially over the past decade. That isn't surprising since many of the estimated 91.2 million U.S. credit-union members are business-owning members. Over time, they increasingly have sought business loans from their credit unions, especially as banks have reduced their small business lending.
Today, about 22% of U.S. credit unions, or more than one-in-five, lend to small businesses. That percentage may seem small, but it's actually substantial since the majority of credit unions are exceptionally small and do little, if any, business lending. Indeed, the average U.S. credit union has $116.3 million in assets, while the average U.S. bank has $1.53 billion. Fewer than 140 credit unions have assets above $1billion.
Even during the recession, credit unions increased their business loans. In the first nine months of 2009, their loans to businesses rose 11% to $36 billion. At the same time, banks' outstanding small business loans fell 3.9% in the year ended June 30. And many credit unions would expand their business lending if they could. But the law doesn't permit it. It places a business lending cap on credit unions.
The current cap on member business lending is 12.25% of assets, although it exempts loans under $50,000. Lifting that limit would generate $10 billion in new funding for small businesses and create as many as 108,000 new jobs at no cost to taxpayers, according to CUNA estimates.
And credit unions have capital to lend, if the cap were raised.
The banking industry, especially independent community banks, are lobbying vigorously against expanding the business-lending powers of credit unions, noting that credit unions are tax-exempt institutions and that federal, state and local governments would lose tax revenues if credit unions got a share of the small business lending fund.
Actually, as Congress ponders what financial institutions should help make small business loans seems a perfect time for credit unions to do much more market analysis to determine what segments of the small business market they should focus on. Just entering a generic marketplace can prove a problem financially. Small-loan delinquencies, for instance, may exceed expectations. This may account for why only 16% of credit unions made business loans in fourth-quarter 2009 when 22% have done so in the past.
A thorough market analysis would determine, for instance, if a credit union serves an area with an above-average percentage of women- or minority-owned businesses. Or, if it served a strong Small Business Administration 8(a) market of socially and economically disadvantaged firms. That SBA business-development program was created to help eligible small disadvantage businesses become independently competitive in the federal-procurement market.
Further, credit unions should make sure they offer a complete set of deposit services to businesses. The volume of work associated with servicing small businesses is much greater than servicing consumer accounts. So credit unions will see an increase in automated clearing-house transactions and wired transfers of funds. Even teller lines are affected as the average business transaction at a teller window usually takes longer than that for a regular member.
While such changes are offset by larger balances and the willingness of small businesses to pay service fees, the traditional consumer-type environment of a credit union will change with small business lending.
Indeed, credit unions find they usually must establish small business customer teams that understand cash management and other needs of small business owners. And they require more sophisticated financial technology to handle business-related transactions, antifraud capabilities and more complex federal regulations, among other tech needs. Credit unions will require further tech advances, if only to handle mobile banking needs of small business owners, a trend just beginning to be felt.
Ultimately, more and more credit unions are expected to offer business loans and related services. And they should, especially since banks are reluctant to underwrite SBA loans and other loans to Mom and Pop operations and other small business owners. Generally, credit unions know their members more intimately than do banks and that also should help spur healthy lending to small businesses.
Patricia Valentino is senior vice president and a general manager at FIS. She can be reached at 904-854-5000 or firstname.lastname@example.org