Increasingly Vital Business Lending
Credit unions have long been the source of micro loans to small businesses. With the 2008 financial crisis, they have substantially grown that role to fill the gap in business lending.
When Glenn Sasser looked for a $25,000 loan to expand his 10-year-old business, his bank turned him down and he turned over his deposits and business loan to his credit union.
When Glenn Sasser applied for a $25,000 small business loan from his bank, he had already spent nearly a decade running his company, A Plus Silk Screen in Odenville, where he refurbishes frames used by silk screeners. He had outgrown the 14-by-32-foot shed behind his house, where he started his enterprise in 2002, and wanted a loan so he could build a bigger shop.
He was confident, he says. After all, he had a good credit score.
Sasser had switched his business checking account from his credit union, Avadian Credit Union, to the bank six months earlier because it offered international wire transfer, which he needed to start importing materials from China. The bank, however, denied the loan because he hadn’t been a customer long enough. But a month later, Sasser learned that his credit union had started offering the business services he needed.
“Once they started doing the business side of it, I knew it wouldn’t be a problem,” says Sasser. “I walked in, opened my business account back up, went to the bank, got my money and left.”
Like Sasser, many small business owners have had trouble getting financing from banks that tightened their credit standards following the nation’s financial meltdown. Credit unions had shunned many of the risky investments that major banks made and began eagerly marketing their services to credit-hungry small businesses.
When MAX Credit Union hired Mark Ziegler seven years ago, the chief lending officer was charged with creating a business services department. At the time, the credit union’s small business lending portfolio was about $200,000, he says. Today, the credit union has $117 million in outstanding business loans.
“When we had the financial meltdown, a lot of lenders tightened their credit or got out of the lending or slowed it down quite a bit,” he says. “We never really did. We adjusted our underwriting some, but we kept lending and growing, so we picked up a lot of that business that other lenders were afraid to loan to.”
In 2012, the number of business loans made by Alabama credit unions rose 13 percent over the same time the previous year, according to the League of Southeastern Credit Unions. This was twice the national average and equates to $54 million in business lending. Over the past four years, Alabama credit unions added $76 million in new member business loans, which demonstrates how quickly business lending by Alabama credit unions has grown, says Mike Bridges, LSCU’s vice president of communications.
Overall, credit unions in Alabama hold $480 million in outstanding member business loans. Many business owners have found credit unions to be more attractive than banks for several reasons, Bridges says.
“From the credit unions’ perspective, the rates and fees are generally lower at credit unions,” says Bridges. “Plus the credit union is looking to work more with the business on its plan and goals rather than looking at it as an opportunity to make money.”
Credit unions are not-for-profit financial cooperatives. Unlike banks, that are owned by outside stockholders and controlled by a paid board, credit unions are owned by depositors, who are called “members.” Membership is based on factors such as occupation, location or affiliation with certain social groups. Credit unions have volunteer boards that are elected by the members. They also are exempted from federal income taxes.
Credit unions, however, have some restrictions. They can’t raise revenue like banks, so, they can’t, for example, sell stocks. Any profits they make must be used to provide members with better rates and fees and end-of-year dividends. The savings at all federal and most state-chartered credit unions are insured by the National Credit Union Administration through the National Credit Union Share Insurance Fund.
Another restriction came in 1998, when Congress passed the Credit Union Membership Access Act. While the law allowed credit unions to accept more groups as members, as a compromise, it capped outstanding business lending by credit unions to the lesser of either 12.25 percent of total assets or 1.75 times the net worth.
Credit union organizations are now fighting the cap. House Bill 688 in Congress proposes raising the cap to 27.5 percent of assets. Proponents say raising the cap could help create 150,000 new jobs and pump $14 billion into the economy, Bridges says.
Credit unions have been lending to small business owners since they were first established in New Hampshire in 1908, according to the Credit Union National Association (CUNA). In general, they’ve been more conservative than banks in their lending practices. The average business loan by Alabama credit unions is about $217,000, Bridges says.
Credit union business members include enterprises such as lawn care businesses, mom and pop shops, convenience stores, hair salons and small manufacturing companies that seek financing for everything from lawn equipment, trucks and printing technology to construction for new buildings. Steve Swofford, president of Alabama Credit Union, which has $19 million in outstanding small business loans, says the start-ups and equipment they have financed has varied.
“They’re buying a truck for their plumbing business or those types of things,” he says, “and it seems that the banks don’t want to do those smaller loans as much as they once did. We recently got a request from a gentleman in the oil pipeline business, and he needed a truck that had a certain sized winch.”
But banks have now begun competing for small business lending. According to Biz2Credit Small Business Lending Index, small business loan approval rates by big banks — those with $10 billion or more in assets — increased to 15.9 percent in February 2013, which was up from the 15.3 percent rate in January. The February figure represents a 35 percent increase over February 2012 at 11.7 percent. Among the smaller banks, approval rates for small business loan requests rose from 49.9 percent in January 2013 to 50 percent in February.
To stay competitive, Alabama credit unions have been marketing business services that the banks offer. They include online banking, investments, payroll and credit card services.
But for Sasser, who now works out of a 1,200-square-foot shop, his credit union also offers more intangible rewards.
“I’ve never had a bad experience with a credit union,” he says. “They’re easy to work with, they know who you are and you’re not just a number.”
Gail Allyn Short is a freelance writer for Business Alabama. She lives in Birmingham.
Further information: Biz2Credit Small Business Lending Index is a monthly analysis of 1,000 loan applications on Biz2Credit.com.