Small Business' Best Ally: Credit Unions
Brianne Hager's Chattanooga bakery B's Sweets has doubled in size in the past year. She had plans to expand more and she needed more cash to feed the growth.
Traditional banks couldn't help her because they didn't lend the small amounts she needed. But she found help and hope in a new program started by Tennessee Valley Federal Credit Union.
B's Sweets is part of the credit union industry's small, but growing, share of business lending. It grew from negligible amounts in the mid-1990s to $37 billion in 2010, according to a 2011 study commissioned by the U.S. Small Business Administration.
From June 2007 to December 2015, small business loans held by credit unions increased 130%, while those held by banks fell 10%, Mike Schenk, CUNA's vice president of economics and statistics, said.
“Many credit unions view this as a way to diversify their portfolios, boost yields and moreover, serve members who operate small businesses,” he said.
After being turned down by banks, Hager heard about a new program being offered by Tennessee Valley called “Idea Leap,” in which the credit union lends $2,500 to $50,000 to new or early-stage businesses that are vetted by local incubators.
One local incubator, BrightBridge, provides loans, but only for amounts above $50,000. “When someone needs that smaller loan, there's really a gap in the market,” Mike Ohlman, BrightBridge's president/CEO, said.
Tommy Nix, vice president of business and community services for Tennessee Valley ($1.2 billion in assets, 121,585 members) helped create a program that fills that gap with the credit union providing the funding and local incubators helping to reduce the risk of lending to new or early-stage businesses.
“Chattanooga has a very thriving entrepreneurial community,” Nix said. “There were a fair number of businesses that didn't fit into the typical boxes for businesses needing money.”
Nix previously worked for Tennessee Small Business Development Center, which advises new businesses. There he learned the value of business mentoring. One of the requirements for an Idea Leap loan is that the business continues a mentorship relationship with one of several approved local incubators.
“The only access to these funds is through these groups,” he said. “If we make a loan, they will be required to continue to work with the group.”
Idea Leap loans can be made for 36 months, or longer for secured loans, depending on the useful life of the collateral, Nix said.
In early October, B's Sweets became the first business to receive an Idea Leap loan.
The inspiration for the business goes back to her son Bryson's first birthday in 2006. Hager decided she would make a fancy “Curious George” cake and learned the basics of cake design. The next year, she made a rocket-styled cake that stood taller than her toddler. “I never do anything ordinary,” she said. “Who wants a white plain biscuit when you can add color?”
She tested out her baking skills for a few years by practicing on a small circle of customers and operating out of her mother's kitchen. She was inspired to rent a space after her mother told her: “I love you and all, but you have to get out of the house.”
The business was formally launched as B's Sweets in March 2012. She shared rental space with a cousin. She added a bowl here, cake sheets there. A mixer here, an oven there. “I kept growing it,” she said. “It's been four and a half years. It's time to grow again.”
B's Sweets is now baking about two dozen cakes a week. But this year she decided she wanted to be less dependent on cakes and even out her revenue by offering classes and adding a retail baking supplies business.
That meant she needed more space, so she took over a neighboring space that had been occupied by a nail salon. That, in turn, doubled her rent and increased her utilities. And then she needed to tie up money in inventory to stock her shelves.
“The retail stuff is money sitting on the shelves,” she said.
This meant she needed to borrow money. She went to a local bank last June. “They said it was not enough of a loan. They didn't do that small of a business loan,” she said.
Through others in Chattanooga's business incubation community, she learned of Tennessee Valley's Idea Leap and was directed to BrightBridge Women's Business Center, where Mary Sedrick became her advisor, helping her craft a formal business plan.
“I’m glad she's my counselor,” Hager said. “She was gung ho. She was really good at making things happen.”
Hager applied for a $7,000 term loan and a $7,000 line of credit in late September. Tennessee Valley approved her loan less than a week later, and the next week she was awaiting delivery of merchandise to stock her shelves for the holidays.
The number of credit unions offering business loans has increased from 13% in 1996 to 37% this year, Schenk said. Part of the increase is related to consolidation among credit unions. “Many of the smaller credit unions have been purchased by larger ones, and larger credit unions are more likely to offer business loans than smaller ones,” said Schenk.
As a whole, credit unions hold $65 billion in Member Business Loans, representing about 6% of credit unions’ total assets. Among those who participate in business lending, those loans represent 7% of assets, about twice the proportion as it was in 1996. Charge offs for business loans are lower than the overall charge-off rates at credit unions, Schenk said.
“We’re active in the marketplace, and we’re doing it in a very safe and sound manner,” Schenk said.
Service 1st Federal Credit Union, based near Scranton, Penn., has nearly $30 million in member business loans. The average MBL size is $150,000, but the average business loan overall is lower because the regulatory classification excludes loans under $50,000.
Business lending at Service 1st ($292 million in assets, 26,655 members) increased significantly in the wake of the financial crisis of 2008, as banks reduced their exposure to small business loans, said Jeff Balestrini, chief lending officer.
“During the recession, these people being forced out were flocking to credit unions. We continue to lend to them,” Balestrini said.
Most of the business loans are secured – usually by the vehicle or property being financed, such as individuals buying trucks for their business. “We come across that quite a bit,” Balestrini said.
Sometimes the loans are done through SBA programs that guarantee at least a portion of the principal. For example, the credit union recently approved a $600,000 loan to a member to buy a restaurant in a deal that did not include the land or building, making the valuation uncertain.
The credit union will advise borrowers or refer them to a local agency, the Bucknell University Small Business Development Center, so the borrowers can shape their dreams into bankable business plans that show not only what they’re going to do, but how they plan to achieve it.
“It's a lot more personal on the credit union side,” he said. “We look at each one individually.”