As small business owners looked to their bankers for relief, some got the cold shoulder to requests for lines of credit increases and loan modifications. Tightened lending standards were the result of financial institutions wanting to minimize risk and keep losses low.
Meanwhile, small businesses went on a search for alternatives to fill in the financing and refinancing gaps. Credit unions were soon reporting they were receiving inquiries from firms that may have never thought to seek out cooperatives in the past.
"In the past two years, commercial banks have curbed small business lending. Such actions have hindered local growth and slowed the economic recovery," wrote Jeff Nolan in a Nov. 29 article on the Callahan & Associates website. "Because these businesses operate in the local community at the grassroots level, they are an attractive target for credit unions."
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Nolan said small businesses use a number of services that are the bread and butter for many credit unions, such as checking accounts and credit cards. Payroll processing and direct deposit services are also popular within the small business sector.
Credit Union Times profiled a number of small businesses that shared stories of how credit unions were able to come to their aid after being turned away by banks. The Bagel Factory in Texas was turned down by several banks before the $4 billion Randolph-Brooks Federal Credit Union came to the rescue. The credit union in Live Oak, Texas, provided an SBA Express loan so that the bagel shop could expand. Northwest Structural Moving in Scappoose, Ore., received financing from the $160 million St. Helens Community Federal Credit Union to purchase specialized equipment to move large structures such as dam gates.
Lending executives at credit unions expanded their small business relationship at record numbers this year. More of the same is expected in 2011 with a few shifts in the winds underway. The October 2010 Senior Loan Officer Opinion Survey on Bank Lending Practices compiled through the Federal Reserve Board revealed that banks are starting to ease their lending standards to businesses.
Most of the respondents that eased standards or terms on commercial and industrial loans cited a more favorable or less uncertain economic outlook and increased competition from other banks and nonbank lenders as important reasons for doing so. Of the relatively small number of banks that tightened standards or terms, most cited as important reasons for the change a reduced tolerance for risk, a less favorable or more uncertain economic outlook or increased concerns about the effects of legislative changes, supervisory actions or changes in accounting standards. Some also cited a deterioration in their current or expected liquidity or capital positions as an important reason.
The October survey indicated that, on net, banks eased standards and terms over the previous three months on some categories of loans to households and businesses. Both large and other domestic banks reported having eased some standards and terms. Large banks were primarily responsible for the easing reported in July. However, substantial fractions of banks reported in response to a set of special questions that standards for many categories of loans would not return to their longer-run averages for the foreseeable future.
"When small businesses lack adequate financing, credit unions have an opportunity to fill in the gap. Building a relationship with a small business is beneficial not only to the business but also to the credit union," Nolan wrote. "It's a way to serve new members and generate new revenue streams."
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