Small business loan application
When I started in credit union business lending in 2001, the numbers to live by were 12.25, 80 and 100. Credit unions were strictly limited to 12.25% of assets in total member business loans, the loans were limited to 80% loan-to-value or less, and 100% of them needed to be reviewed annually. As a result of this tight box, the industry evolved into primarily funding loans secured with real estate. In fact, December 2019 Call Report data showed over 90% of credit union commercial loan balances are secured by real estate. That focus on real estate investors leaves many small business owners out.
What's Holding Credit Unions Back?
Before joining a CUSO, I managed a credit union loan portfolio and focused on maintaining liquidity under the NCUA member business lending cap. We were forced into primarily funding real estate since our main outlet to manage the cap was in loan participations. Non-real estate, small business loans or lines of credit are virtually impossible to sell in the participation marketplace. Today's credit unions have tremendous freedom and ability to fund loans to their local, small businesses. With 45% of credit unions having a low-income designation, many may expand beyond the traditional 12.25% of total assets. Today's credit unions can also deduct any one- to four-family residential investment property loans and loan participations from the regulatory cap. There is enough liquidity in the marketplace for credit unions to make business loans. Recently, some credit unions have risen to the occasion, working through the challenges of the SBA's Paycheck Protection Program (PPP) to fund emergency loans to local small businesses. However, there is still a huge opportunity.
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Legacy Issues Can Cause Difficulties
I lost many loans early in my credit union career on vehicles and equipment, or to service-oriented businesses due to collateral requirements. The 80% loan-to-value limitation was designed around real estate loans with good intentions, but it took credit unions out of many "Main Street" small business loans. In 2017, the NCUA modernized the member business lending rule.
What's the current loan-to-value limit for credit unions? There isn't one. Credit unions have explicit regulatory authority to make collateral decisions that make sense for the size and complexity of the loan and credit union. Many businesses in your community are service businesses that may not have large amounts of fixed assets or own real estate. Some of these businesses have likely been impacted by the pandemic and need affordable financing options.
Are Internal Policies Holding You Back?
Collecting updated tax returns and personal financial statements on small loan balances, where the expense of the review far exceeds the income on the loan, can be a waste of time and energy. When your member received their $75,000 line of credit from the local bank, they weren't forced to submit annual financials. Credit unions involved in member business lending quickly figured out they need to make larger loans to keep up with the regulatory requirements.
Is collecting financials and completing annual reviews important? Absolutely. Are they needed and feasible on every relationship? Absolutely not. Business lending deregulation allows credit unions to manage their portfolio effectively on a scale that makes sense for their cooperative and the risk in their portfolio.
Setting the Right Goals for Your Program
The NCUA has created a regulatory framework where credit unions can safely and effectively deliver loans to their members with small businesses. Why haven't we taken advantage of it as an industry? If your business lending goals focus on dollar volume growth, staff will naturally flow toward larger loans, as it can take just as much time to process a $60,000 loan as a $600,000 loan. Systems and processing can get in the way of serving small business members. If your credit union doesn't have tiered processing levels or automated systems, it can lead to a frustrating experience.
Effectively Competing With Online Lenders
Would your credit union want to help small business members with an average credit score of 709, $679,000 in revenue and over nine years in business? Those are the average demographics published by OnDeck, which will fund over $2.5 billion in loans per year with a portfolio yield of 36%. Credit unions can and should look to serve this marketplace. Small businesses are shifting toward online lenders because they can get the funds they need quickly. The Federal Reserve Small Business Credit Survey revealed online lenders are a choice for 32% of small business versus 9% for credit unions.
Three Steps to Making More Small Business Loans
Building relationships with small businesses can deliver deposits, loans and investment accounts to credit unions. What do we need to do to serve more of this market?
1. Evaluate products and policies to ensure they are not creating unnecessary roadblocks for potential new relationships.
2. Make small business loans and relationships a priority in the goals and mission of your business lending program.
3. Invest in systems or partner with third parties that can make small business loans as simple for your members as those they can receive from local banks or online lenders.
Credit unions are primed to help small businesses and we already have many members who own them. Let's make sure we help them to our best ability when they need us most.
Mark Ritter Mark Ritter is CEO of the CUSO Member Business Financial Services in Philadelphia, Pa.
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