- Things have changed in the past decade–Generations FCU had begun lending to small business borrowers.
- But none of the existing business loan products really fit the members’ needs for both a mortgage loan and a business loan.
- In conducting research to find a solution, the lending officers discovered the SBA’s 504/CDC loan program.
For San Antonio, Texas-based Generations Federal Credit Union, helping out members has meant making the sorts of loans it had never made before or had even contemplated making.
The occasion to break new ground in lending came when two longtime Generations members, Al and Ramona Diego, were looking for a financial institution that would help them finance the expansion of their small business into the San Antonia area.
The Diegos had been members since the credit union was called San Antonio City Employees Federal Credit Union, and Al had been eligible for membership through his career as a San Antonio police officer. He’s now retired.
But when Al and Ramona, a registered nurse with more than 25 years of experience, approached the credit union for a loan to finance starting up a home health care agency, the credit union had to turn them away. At the time, more than a decade ago, the CU did not offer business loans.
Undeterred, the Diegos uprooted themselves from San Antonio and fell back on an inherited property in Del Rio, Texas, to use as a business headquarters. They borrowed against Al's retirement savings to launch Amistad Home Health Care in 2002, at the time one of the very few home health care agencies in that part of the region, and one of the few in the state.
Life as owners of a small business in the then-little-known field was hard, but Amistad flourished and grew and eventually the Diegos sought to expand their business back into the San Antonio area, which would bring them closer to family.
Once again they began to make the rounds of financial institutions, looking for a loan to finance the expansion and relocation. Confident, this time, that decades' worth of small business experience and success in what had become a recognized industry would be enough to qualify them as business borrowers. But they were wrong.
This time, instead of being too inexperienced and untested to be considered for a loan, the Diegos found their loan was considered too small. Banks they approached simply were not interested in funding a business loan of $700,000, no matter how much business experience the borrowers might have.
Growing desperate, Al decided to give Generations another try, even though he remembered having been told before that Generations did not offer business loans. But to his and Ramona's surprise, things had changed in the decade since they last asked: Generations had begun lending to small business lenders.
"Once the credit union got involved," Ramona said, "that's when everything finally began to happen."
But what began as an optimistic move forward with the CU soon ran into a potential snag. None of the existing business loan products that the CU then had would really fit the Diegos’ needs for both a mortgage loan to buy a business property and a business loan to finance construction on that property.
"This is when we started really getting to work," explained John Corona, senior lending officer for Generations. "These were our members, they had been our members for years. We were determined to figure out a way to help them."
Corona began to research into alternative products, products that Generations had never offered before. Part of that research involved talking to former colleagues at other credit unions and asking if they knew of any product that might fit the Diegos' needs. It was in that context that Corona first heard about the Small Business Administration’s 504/CDC loan program.
"We had never offered that sort of loan before," Corona said, "and we really didn't know much about it. But I took the idea to the Diegos and asked them if they wanted us to try it. With their agreement, we decided to move forward into completely new territory."
One of Corona's first moves was to bring in Tim Hero, Generation's real estate lending officer, to help pull the deal together. That turned out to be a good thing to have done, because many of Generations' lending policies and procedures needed to be changed to reflect the new products.
"Policies, forms, everything had to be created from scratch. We had to set new standards and make new molds. It was a complicated process, but Tim and I were determined," Corona said. "We did it not only for the Diegos, who were our good members, but because we realized it would be good to position Generations to start to move into this market."
One of the first pieces of good news was that the credit union would not need to be a certified Small Business Administration lender to offer a section 504 loan, but it was a bit of more challenging news when Corona learned that they would have to work with an outside agency, a certified development corporation, on the loan.
CDCs are nonprofit corporations set up to contribute to the economic development of their communities. CDCs work with the SBA and private-sector lenders to provide financing to small businesses. There are about 270 CDCs nationwide, according to the SBA, and each CDC covers a specific geographic area.
The CDC Generations and the Diegos found was the Capital Certified Development Corp. in Austin, Texas.
Conflicting federal regulations provided some of the hurdles Corona and Hero had to overcome.
For example, the 504 loan program allows the borrower to put down only 10% as a down payment, but NCUA rules require commercial real estate borrowers to put down 25% as a down payment. The apparent conflict between the two rules needed to be resolved, Corona said.
Under an SBA 504 loan, the financial institution typically puts down 50% of the loan amount, the CDC partner puts down an SBA-backed 40% of the loan amount and the borrower puts down 10%. But despite the minority position in the loan, the CDC plays a crucial role since it is the organization that certifies that the loan is being used for development and that the borrower meets other 504 loan criteria. This might cause a credit union to be cautious about the loan, but Corona and Hero said Capital had been very easy to work with and continue to be so.
But even after the loan closed, Corona said that his feeling of real success did not arrive until after the NCUA examiners had come in, reviewed the loan, and left–without objecting to any part of the Diego deal.
"The NCUA came in and did their audit," Corona said. "Since this was our first 504 loan, they really buckled down and went over it with a fine-toothed comb. But they found no problems and made not a single exception or finding. As a loan officer, that was my moment. That was when I knew I had really done it right."
Since then, Generations has been fielding calls from other entrepreneurs and business owners about the possibility of a 504 loan and that has led Corona to reflect a bit about the impact of what he, Hero and Generations have managed to do.
"You can look at it from the viewpoint that we helped the Diegos and we helped Generations," Corona said. "But I think we also helped the broader San Antonio community as well. Because of the Diegos moving their headquarters to San Antonio, 25 people in our community will have a job. They will buy houses, they will buy clothes, they will pay bills and stand firm in their finances. And that number will only increase through the years. That, to me, is what makes this project a success; when you increase your impact in the broader community."