Small business owner. Source: Shutterstock
There is an axiom in the basic training within any commercial lending program that usually states something like "tomorrow's cash pays today's loan." What that means is that we need to understand what a credit's cash flow will be like in the future instead of just assuming the past success or failure will continue. It goes without saying that when a credit union reviews the past few years' financials of a potential business loan, it may encounter wild swings and anomalies. These could be swings in either direction as far as income and the balance sheet go. Let's take a minute to review some recent trends with credit unions and business lending to see how your program may need to adjust in the future.
A Blockbuster Year, Despite the Pandemic
First and foremost, 2020 was a blockbuster year for credit union business lending and there appears to be no easing in 2021, according to most reports. Per NCUA Call Report data, the number of commercial loans funded by credit unions compared to 2019 was up by 12% with the dollar amount of commercial loans funded last year up by 22%. These numbers are outside of the SBA PPP loan program and are quite amazing when you consider that for a few months during the early days of the pandemic, new loan activity was virtually non-existent. Commercial loans purchased as participations grew year-over-year by an astounding 36% as many credit unions sought outlets for increasing liquidity.
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Overall credit union participation in assisting business members remains relatively flat while portfolios expand. In 2020, 869 credit unions reported funding at least six member business loans. This number has remained virtually unchanged over the past decade. Business loan portfolios surpassed $82 billion at the end of 2020, which is a 15% increase over 2019. Driving the increase is an upward trend in the average size of a credit union business loan. The 2020 average business loan was $390,000. Credit unions continue to gain experience in business lending, which has allowed them to increase the size and complexity of the loans funded.
The Resurgence of Small Business
The most exciting trend for credit unions now and for the next few years will be the resurgence of local small businesses. Many small businesses have struggled over the past year with lockdowns and retaining staff. These factors are quickly subsiding and businesses will seek capital to grow or revitalize their operations. Credit unions must be able to react quickly and be able to finance the growth. SBA loans and non-real estate term loans will be the primary means to assist your local community. Over 90% of the credit union industry's business loans are real estate secured financing. However, in the short term that may not be what your members need to be successful. In the past, the next step for a growing business was to buy a building to house their expanding operations. As work-from-home and hybrid offices become normalized, these businesses may need to finance growth other than real estate. If their credit union is not prepared to assist, they may find another financial institution that will.
For several years, lenders have been cautious about commercial real estate lending for retail space and now smaller office footprints may make lenders cautious about certain other segments as well. All the inventory from the retail shops we miss are now located in large industrial warehouse spaces. If you order groceries online, your food is often delivered from a cold storage facility and not being pulled off the local grocery store shelves. Hundreds of millions of dollars in industrial space will be absorbed over the next few years to offset much of the retail space until those vacancies are repurposed. Industrial space is often hidden from public view, so credit unions may need to educate staff and decision makers about the nuances of industrial space lending to make better decisions amid increased demand.
The Rise of Hyper-Localization
Another trend to watch will be hyper-localization and shifts in the marketplace, not just city to city but block to block. Populations are shifting rapidly, and rural or suburban areas that saw a big upsurge of newcomers could see the whiplash effect of those people returning to their previous homes. Multifamily rental units in large urban areas that struggled recently could see a rapid recovery or continue to languish. Local policies of governments and major employers could have a dramatic impact on the supply or demand of rental units or office space. Have you been solicited for a participation loan out of your market? Read the local news outlets about what is happening, or better yet, visit the property and area onsite to make a better-informed decision about the credit you are considering purchasing. Relying on stale industry data or past financials could place your credit union in a precarious situation. Just as 2020 saw unprecedented economic shifts, you could see the tides move back and a regression to normal figures take place.
Look to the Future for Smart Credit Decisions
Lending volumes are strong across the board for credit union business lending. However, a key overall theme for smart credit decisions will be to react to the changing data today with reasonable projections for the future, not simply looking at the past. In 2020, strong businesses had horrific financial years due to factors completely out of their control. 2020 also witnessed businesses that were "pandemic winners" and experienced record sales and profits. Markets will shift and ease back into place. Being prepared to assist small businesses and monitor the real estate markets will help your credit union succeed for years to come.
Mark Ritter Mark Ritter is CEO of the CUSO Member Business Financial Services and its subsidiary, Nu Direction Lending, in Philadelphia, Pa.
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