CARMEL, Ind. — When it comes to attracting small business owners with higher net worth, credit unions are more than holding their own when compared to larger banks.
Baker Hill, an Experian Company, has just released its 2007 Baker Hill Benchmark Report Small Business Lending Edition. More than 160 financial institutions, including credit unions, were surveyed to garner feedback on their lending practices. One significant finding for credit unions was the average net worth of principals who submit a business loan application. In the approval category, the average net worth was $4.4 million compared to just under $2 million for financial institutions in the $500 million to $2 billion range.
"This is where credit unions really shine," said Joel Pruis, credit quality and origination practice manager at Baker Hill. "[The higher net worth] could be a combination of two things–the approvals could indicate that [credit unions] are not being terribly restrictive and of course, there are higher net worth people applying for loans."
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Overall, the average age for loan applicants was 53 years old, according to the report. For credit unions, Pruis said that age could potentially lead into other cross-selling opportunities such as investment accounts and trust services. At that age, there's also a five to 10 year horizon before the current owner is either going to retire and consider selling the business or transferring it to someone else, which could lead to another opportunity for credit unions to offer additional investment banking activities.
The other areas where credit unions continue to lead are the number of loan products processed in a single application at 1.2 products, the report found. One out of every nine had two products compared to the overall average for all financial institutions tracked was 1.07, which amounts to one out of every 14.
On average, credit unions are processing 209 loan applications over the course of a year, the data showed compared to 167 for financial institutions under the $500 million mark and 409 for those over $500 million in assets.
"When you have a small volume and heavy concentration on real estate loans, both of these tend to lead to taking longer to process loans," Pruis said. "If you're not having a huge amount of volume, there's no pressure to get [the loans] processed [faster]."
Pruis said credit unions are also doing a "good job" cross selling on the credit side but the same can not be said for the business deposit side. Credit unions had the lowest average business checking accounts compared to other financial institutions.
"It leads me to believe that [credit unions] are tracking the right individual for small business applicants but they're not cross selling into other deposit services as strongly as the could," Pruis explained. "I don't know if they don't have as many products on the deposit side of if they're just not making the products aware to applicants."
Meanwhile, for the first time since the report began, this year's data indicates that midsize financial institutions, defined as those in the $2 billion to $20 billion in assets, are responding to application requests faster than large financial institutions in the $20 billion to $100 billion range. For the last three years, benchmark data showed that the larger institutions responded more quickly but this year's finding demonstrates that midsize institutions are starting to leverage efficiencies on behalf of their clients. The flip may be a result of some credit quality issues that "are still hampering banks greater than $20 billion."
"We're seeing an increase in net chargeoffs and maintenance issues in delinquencies," Pruis noted, adding about two years ago, larger institutions significantly increased their application size and by taking on a larger scope, "there's always a transition going from commercial to small business."
Another reason why the $20 billion to $100 billion banks have slowed in the application responses might be because on the commercial side, applications that were considered "small," didn't get as much attention as its bigger counterparts, Pruis said. Now that there's more emphasis on courting smaller businesses, larger banks are addressing credit issues quickly but not necessarily spending more time nursing such applications.
"There had been talk in 2006 that credit quality issues had fallen. Small businesses can't weather storms very long and you tend to see a much faster impact [of their condition] on any type of issues affecting the economy."
One interesting fact discovered in the report's data showed that almost 89% of all businesses are microbusinesses with $1 million or less in annual sales with an average of 6.2 employees. Seventy-one percent have four or less employees. Pruis said these types of businesses should not be ignored because it can help credit unions and banks build a profile of the types of services to offer them.
"When you have a [micro] business, everyone's typically wearing multiple hats so then you ask 'how are we making services more convenient,'" Pruis said. "Do we have online services for them and are we offering
longer hours."
The fact that 43.5% of small businesses are in the service industry may help credit unions and others decide how and where to focus their marketing efforts, Pruis suggested. The downside with the service industry, which has caused a "bit of heartburn" for commercial lending, is they tend not to have hard assets such as equipment and inventory.
"In the service industry, you land a contract but you may or may not get repeat business unlike in manufacturing," Pruis said. "You can go through some dry spells. That type of mentality tends to have some of the more traditional bankers not getting into that industry but since [service] accounts for nearly half of the small businesses, they can't ignore them."
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