Federal agencies offer rule change, training to boost CU participation.
Business borrowers really like credit unions—when they use them.
In fact, credit unions have some of the highest business-borrower satisfaction rates among all types of lenders, according to the Federal Reserve’s latest Small Business Credit Survey. Satisfaction with credit unions was 76% among applicants for new credit. Among small businesses with existing loans, lines of credit and cash advances, credit unions garnered an 85% satisfied rating, higher than the satisfaction rates for small banks, large banks and online lenders.
Despite these figures, only 9% of small businesses sought credit from credit unions last year, according to the survey. And few credit unions are involved in lending programs backed by the U.S. Small Business Administration that cater to small businesses.
Only 178 credit unions, or 3%, were active lenders in the most popular SBA program—the 7(a) loan program—in fiscal year 2018. This is the case despite the fact that SBA lending has gained momentum among small businesses in the past five years. The number of SBA loans by all financial institutions increased 30%, and the approved dollar amount of SBA 7(a) loans jumped 42% (from $17.8 billion to $25.3 billion) during that time period, according to SBA statistics.
Credit unions in fiscal year 2018 originated just 1.2% of all approved SBA loans, and overall 7(a) volume from CUs declined nearly 10% from the previous year, according to statistics cited by American Banker.
“Why aren’t credit unions offering SBA loans?” asks Rob Ashbaugh, executive risk management consultant for Abrigo, Austin, Texas. “They can do it, but some just don’t see the benefit or the need for it.”
Many credit unions focus on consumer credit and, therefore, have less interest in business lending, Ashbaugh notes. Others that do offer member business loans lack experienced SBA lenders on staff, he suggests. Of course, federally insured credit unions also have a cap on aggregate member business loans of 12.25% of assets, so even those that are growing member business lending will be limited in some ways.
More Room for Business Lending
However, a rule change by the NCUA last year said member business loans made on 1-to-4-unit family dwellings would no longer count against that cap, giving credit unions more room for business lending. For credit unions that offer member business loans and want to grow, now might be a good time to look into SBA programs. Such programs guarantee loans that financial institutions can offer to small businesses at low borrowing costs.
“If you think about it, if you’re a credit union that wants to do business lending, most of your business is going to be to members that own small businesses,” Ashbaugh says. And, “if credit unions are already doing small business loans, it would make sense to have an SBA option to give their members as many options as they can.”
SBA, NCUA Promote Lending
The SBA and the National Credit Union Administration recently unveiled a new effort aimed at boosting participation by credit unions. They announced a three-year agreement to promote SBA programs to credit unions through webinars and training events.
The agencies are looking for ways to help credit unions better understand and make use of the SBA-backed loans and resources. Neither agency provided specifics on their plans.
“Everybody [understands] the benefits of SBA lending, it’s just getting organizations to commit and getting moving on it,” Ashbaugh says. “Often, they think the barriers to entry are too high, but the SBA is bending over backward to get as many financial institutions involved as possible.”
One way credit unions and other financial institutions can get a head start on SBA lending or accelerate growth in existing programs is to incorporate technology that streamlines the underwriting process. An SBA-tailored lending solution can eliminate duplicative data entry, generate required SBA forms and decision SBA loans in the same platform as other personal loans or member business loans. Such platforms can provide management with greater visibility across the SBA portfolio, reducing bottlenecks and providing faster decisions to members.
“Technology can really help you originate your loans faster, and the underwriting and approval process will be faster,” Ashbaugh says. “That way, you can respond to your customer faster and keep the costs down.”
Mary Ellen Biery is a senior writer and content specialist at Abrigo, a software company that offers technology that banks and credit unions use to manage risk and drive growth, headquartered in Austin, Texas.