The increasing importance of credit union financing in small business operations and lending has recently been the topic of an SBA Advocacy report. As of this posting, a million customers have moved their checking and savings plans from banks to credit unions. Coincident to the Occupy Wall Street activity and prompted by Bank of America’s ill-advised debit card fee, credit unions are swamped by applicants while major banks don’t even seem to notice. What does this “revolution” mean to small businesses?
As recession-bound banks hold back on loans to small businesses, credit unions are taking the initiative. And, with their sudden growth in deposits, they appear ready to move aggressively when Congress raises their cap on loans.
The Small Business Administration watched bank lending to small business decline by 6% in 2010. It also reports credit union financing increased by a comparable percentage. Still, commercial banks lend 200% more than credit unions, so we will have to see if this trend continues. Nonetheless, it’s worth looking at your local credit unions to see what they can do for your small business.
For starters, credit unions account for only 5% of the total lending pool. However, the Small Business Lending Enhancement Act, introduced to Congress in March, could raise the current lending cap to 25% of their assets. This more than doubles their lending potential. With their lending cap raised and their influx of deposits, credit unions will expand, multiply, and hire.
It is also likely that, as economic confidence returns, lending underwriting guidelines will loosen allowing businesses to borrow more with less secure experience and collateral. Among other things, credit unions are exempt from federal corporate income taxation. They do not belong to the FDIC; instead, they have a separate deposit insurance system and fund – with lower premiums. Such features help them to provide lower-priced products and services. They are non-profits, and this may reduce performance incentives for management.
Small businesses have been underserved by banks in recent years – despite a $30 billion commitment by Washington. In addition, only 30% of the nation’s credit union lend to small businesses. But, credit unions are seeing gold in the weaknesses in today’s bank market and are upping their staff training to underwrite and market small business loans.
Give it some thought: look at what your local credit unions can do for you, check their credibility with CUNA, move your money if and when it is in your own interest. Remember, that most credit unions – unlike banks – are local and “behave” like small businesses in your community. You may find you have a lot in common.
by Steven Schlagel