The Great Depression and the decades leading up to it forcedmany to look beyond their comfort zones just to be able to surviveanother day.

Be it a bartering system that exchanged services for bread andfruits and vegetables or a small group of factory workers poolingtheir wages to form a lending system after being shunned by banks,survival became the impetus.

Despite the intense heat on credit unions and business lendingthese days and the critics who condemn their efforts to expandsaying the moves are too risky to undertake, cooperatives have beenoffering business loans in some shape or form since the movementformed in the United States more than a century ago.

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It was not until 1987, however, following several credit unionfailures due to business lending, that the NCUA promulgatedregulations specifically targeted at this type of lending,according to a 2001 Department of Treasury report.

After the NCUA revised its business lending regulations in 1991,the quality of credit unions’ member business lending portfoliosgrew stronger through the 1990s, Treasury said. As of June 30,2000, member business lending delinquencies stood at 1.84% comparedto 8.20% as of year-end 1993. Today, the rate is hovering around1.5%.

With stronger safeguards in place, more credit unions began toenter the business lending space. Along with that new presence, theindustry began to compete squarely against community banks, many ofwhich shared similar operational models that emphasized localdecisions. To this day, they continue to be credit unions’ biggestcompetitors.

“Community banks are traditionally the biggest and toughestcompetitors for credit unions,” said Larry Middleman, president/CEO of CU Business Group, a business lending CUSO in Portland,Ore., that serves nearly 400 credit unions. “A lot has happened ifyou go back six years. The last three years were the go-go yearsfor credit unions because everyone was retrenching and pulling backand becoming non-competitors.”

Middleman said while larger, national banks are not a hugecompetitive threat dominating the market, they have a productpacked with technology features – a lure that appeals to many smallbusiness owners.

Still, a sweet spot for credit unions is courting and buildinglong-term relationships with businesses that have 25 to 50employees, Middleman said.

“It’s been pretty easy for credit unions to do,” he noted. “Butto pull in the larger businesses, competing with community bankshas always been tough.”

One of the industry’s newest competitive threats is CostcoWholesale Corp., Middleman has noticed. As of 2011, the warehouseclub chain based in Issaquah, Wash. had 520 locations in the UnitedStates, United Kingdom, Canada, Australia, Mexico, Taiwan, SouthKorea, and Japan, according to company data. Costco has severalpartnerships that bring services to small businesses, often atinexpensive rates, Middleman said. For instance, the warehouse clubhas a merchant bank card alliance that has been going strong overthe years, he added.

“Pricing is cheap but it’s tough to get a lot of service,” heexplained. “They’re cheap so you get what you pay for.”

Another competitive nuance has been spotted right at home withinthe industry: credit unions and CUSOs competing more with eachother. Middleman said the competition has ramped up over the pasttwo to three years. If there’s a CUSO that serves credit unions ina state or larger region of states, several credit unions could becompeting for the same loans in the same marketplace.

“It poses an interesting quandary and if two of them work withthe same CUSO, that can also be interesting,” Middleman. “If youhave three credit unions that own a CUSO and all three are in on aparticular deal and you have ownership, how do they all handlethat?”

As a general rule, CUSOs may ensure that each deal is handledindependently and information is not shared to avoid any potentialloan overlap in the same locale, Middleman said.

“With respect to credit unions competing in the same market, Ithink it’s a really good thing,” he offered. “They all have acommon goal of how to treat their members. The underwriting isusually fairly conservative.”

The aberrations may come with a deal such as a $5 millioncommercial office building when community banks, larger banks andlife insurance companies are all vying for the same transaction,Middleman said. It might be a 10-year, fixed rate loan –transactions that credit unions tend not to do, he noted. As aresult, they often lose out of the deal to theircompetitors.

Indeed, insurance companies are looking to carve their nichemore in commercial lending due to the partial demise of commercialmortgage-backed securities, said Pete VanGraafeiland, vicepresident of business lending at the $2 billion Coastal FederalCredit Union in Raleigh, N.C.

Because of the type of loans that the cooperative does and theterritory Coastal FCU is in, many of the insurance companies were payingproduct from CMBS, typically called a conduit, VanGraafeiland said.When they ran into trouble with their mixed used portfolios, manypeople lost faith in them, he added.

“Conduits just went away, some were shut down and some put theirproduct on the shelf,” VanGraafeiland said. “There was littlecompetition in that arena. There was some competition from thenational banks.”

With a track record of commercial lending, Coastal FCU doesn’tget a lot of competition from community banks “despite what the ABAsays,” VanGraafeiland said. The credit union tends to do long-termdeals between seven and 15 years. As a result, the most aggressivecompetition comes from insurance companies, credit companies andsurviving or reinvigorated conduits. Over the last two and a halfyears, the conduits have ramped up their hiring and their parentcompanies have started to breathe new life into those that weredormant for years.

“Some of them are pure real estate lenders but they might bemore conservative with a 65% to 75% LTV range with much lowerrates,” VanGraafeiland said. “Others want to do investment gradedeals. They are very aggressive with an 80% LTV, 30-yearamortization and very low debt service coverage. We can’t competewith them because they’re doing very big deals. They’re up there inthe ionosphere.”

Beyond physical competitive threats, VanGraafeiland saidregulations may stifle the credit union industry’s ability tocompete; most notably, the 12.25% of assets member business lendingcap. In February, Coastal FCU was $2 million from its cap. Asell-off of some loan participations provided some breathing room.“It’s a daily occurrence to keep us out of the ditch,”VanGraafeiland said.

Another regulatory disappointment for some medium and largercredit unions was the cancellation of RegFlex, he noted.Well-capitalized MBL lenders have to go through all kinds ofregulatory steps to get a waiver for certain types of loans.VanGraafeiland said the process is very time consuming and creditunions tend to miss out on many high quality loans.

As the business lending scape continues to evolve with newplayers coming on the scene, that transition may not be the biggestthreat. The recent implosion of business lending programs at TexansCredit Union, Telesis Community Credit Union and others may have caused somecredit unions to shift their way of thinking.

“I’m starting to get more inquiries asking ‘how do we build ourown platforms,’” said Steve Sala, principal with SFE Advisors, aconsulting firm that does workouts, counsels senior managementthrough execution of corrective action orders and serves as athird-party loan review function for credit unions andbanks.

“There are a lot of concerned credit unions and CUSOs scratchingtheir heads,” Sala said. “A lot of people are saying ‘what are webuying into if we go down this road.’”

Sala said SFE Advisors was hired to work through the troubledbusiness lending portfolio at AEA Federal Credit Union, which madeheadlines recently when its former business lending vice presidentwas convicted of fraud for a kickback scheme that led to thecooperatives’ conservatorship and near collapse. Sala was called onas a witness by the Department of Justice in the recent trial inArizona to convict William Liddle, his wife, and Frank Ruiz, a realestate developer involved in the scheme.

“Culturally, there is a difference between banks and creditunions,” Sala said. “A community bank doesn’t typically farm itout. If they want to do business lending, they will hire acommercial lender. Yes, it costs more. Where do you find thesepeople -- across the street at a bank. This is where things come toa screeching halt with credit unions.”

Many credit unions may not be able to offer the high salariesthat former bank commercial lenders are accustomed to. Sala saidthey also tend to promote from within, which can create a roadblockto compete because that new lending officer may not have theexpertise to take the loan program far.

“The best way to get the best person is hiring someone who’sbeen to the university of hard knocks, someone who’s been throughthe battle,” Sala said. “During the good times, credit unions mightsay ‘how hard can this be.’ But during the bad times, the hardestpart is getting out of a bad loan.”

Sala said credit unions have much to offer small businesses.However, they can sometimes be their own worst enemy.

“There is a wonderful space for credit unions to play in withouta lot of competition. But they show up at a buffet with big eyesand want to put everything on their plate,” Sala said. “Then theysit back and say ‘what do I do now.’ People get outside of theirsweet spot of what they do well. If you ‘re a long-term thinker,you’ll be better served to hire the right talent and develop yourown platform.”