While politicians look to Wall Street to guage the national economy, credit union business lenders that serve Main Street say they see signs of improvement-along with problems for small businesses that are outside their control.
Here in this city at the Southern end of Puget Sound, Harborstone Business Services, the CUSO of harborstone Credit Union, said it has found plenty of appetite for borrowing. Those doing business with the CUSO have primarily been professional firms, such as lawyers, doctors and accountants, according to John Renforth, senior VP-marketing.
"Some retail clients have inquired, but that area is not a focus for us," Renforth reported. "We are seeing lots of business services firms-all sorts, and all types of services. Another area is commercial real estate. People are looking to buy or build office space for lease."
Mike McKeon, Harborstone's vice president of business banking, worked for banks for 30 years before he was recruited 11 months ago to help open Harborstone Business Services. He noted that the Puget Sound region remains dependent on aircraft manufacturer Boeing for many jobs, but small business is leading a recovery.
"Small business people are the heroes and heroines of America," McKeon told The Credit Union Journal. "They produce the most jobs in the country, they take risks, they work 60 to 70 hours a week. Most of them persevere, some are very successful, and many fail. Nevertheless, they are heroes and heroines."
According to McKeon, a strategic decision by big banks that happened about 20 years ago has created an opportunity for credit unions in member business lending. He said the banks decided to remove experienced lenders and decision- making capability from their branches. This transformed branches into places to collect deposits and forward applications for loans to a central location. "Small business people need access to bankers. They don't thrive with 800 numbers and faxed applications," he said.
In response, community banks began to thrive. Recently, big banks tried to re-enter the market by adding talent back into their branches, but they are hamstrung, according to McKeon, by a second fateful decision made about 20 years ago-to end management-training classes.
This is an opportunity for CUs, he said, while also acknowledging a potential problem.
"Credit unions have huge training challenges because, as a group, we have not done business lending," asserted McKeon. "Credit unions traditionally have been passive. They cross-sell after a person comes in. They need to be more proactive in sales."
"These are huge issues," he continued. "Over the last 50 years, for 49, credit unions steadfastly didn't do business with business. They need to compete with the community bank across the street. But the entire culture-the titles to put on a business card, the location of the manager's office within the branch, the type of activities-all is unfamiliar to credit unions. Community banks are trained in this and are experienced."
Don Clark, president of Mountain America Financial Services, a wholly owned subsidiary of Mountain America Credit Union, said businesses in Salt Lake City, Utah, seem to be thriving. "There is lots of activity here. We were fortunate to have had the Winter Olympics here and the economy is still good." he said.
Most of Mountain America's commercial borrowers are successful business people, and many of those looking to get an MBL have taken out a loan before, Clark reported. Mountain America Business Services has two departments: one that does commercial lending and one for Small Business Administration loans.
"We are the No. 1 SBA lender (in terms of loans funded among credit unions) in the country, according to the SBA," said Clark. "Those are the people who want to own their own business. Our volume is good, and our pipeline is full."
Jeff Stone, senior vice president of business services for North Island Financial CU in San Diego, Calif., said his credit union is a relatively new player in the MBL field. He said North Island mostly is attracting loans from two sources: existing members who have established businesses, and people whose community banks were consolidated or bought out.
"In San Diego, some of the largest and most prominent financial institutions are credit unions," Stone said. "The established businesses are looking for a new relationship. It is not a function of the economy, it is just a desire for better service-which a credit union can provide. In the case of start-up businesses, some exist because people got laid off from their jobs, and we try to help them if we can."
Stone said the unemployment rate in the San Diego area is below the state's rate, which helps the area's overall economic outlook. He said North Island does not have collection problems on its business loans.
Tom Murray, senior director of business lending for Desert Schools Credit Union in Phoenix, said his CU began offering member business loans June 2, so it does not have historical trends. However, Murray noted his 25 years of commercial banking experience gives him a good perspective.
Approximately 35,000 of Desert Schools' 250,000 members are small business owners, said Murray. Many of those are "microbusinesses," which he defined as established or starting businesses with one to three employees. "These people either are looking to get out, or have been displaced from, corporate America," he said. "We are seeing huge numbers of applications, many of which are from people who have capitalized their businesses from several sources, including credit cards, home equity loans, and friends and relatives."
Desert Schools' approval rates on applications for member business loans is 25%, which Murray said is consistent with the marketplace. He said roughly half of those rejected are due to credit considerations-the applicants have too much debt relative to their income, delinquent credit or insufficient collateral.
"About 15% of those rejected might qualify for an SBA loan. They don't have adequate capital or collateral, in our opinion, but they might have enough for the SBA," he said. "We are in the process of applying to be an SBA lender, but we have not been approved yet."
Desert Schools serves 1,200 SEGs, plus school district employees in Maricopa and Pinal Counties in Arizona.
Murray said he is seeing an enormous number of small loan applications-the average loan size is just $33,000. "This says to me that modest-sized commercial businesses aren't applying," he said. "They are just hanging in there. The microbusinesses are applying. The smaller the business, the more economic conditions have had an impact on them."
Complaints and Worries
While the credit union executives interviewed by The Credit Union Journal were generally positive about member business lending and about the U.S. economy, most of those interviewed said small business people had concerns about the present and the future.
Some of these complaints could apply to almost any endeavor. In Chatsworth, Calif., for example, Grace Mayo, CEO of Telesis Credit Union, which is heavily involved with the business lending CUSO Business Partners, LLC, said business owners were most worried about time.
"They need to run their businesses, handle their finances and find a financial solutions provider," she said. "In many cases, a small business is like a small credit union-the owner can't leave the office because there is no one else to answer the phone. So we have to go to them sometimes."
Mountain America's Clark said small businesses simply need funds now. "They want speed in processing. Some have been told by banks funding for a loan will take 60 days, and that's too long," he said. "We can turn around an SBA loan in as little as 15 days."
Columbia Community's Anderson said his members have voiced a similar message. "They just want to get their financing. Small business people are, by nature, optimists. They feel like they are the ones who will make it."
In San Diego, North Island's Stone noted that interest rates are slowing the refinance boom.
Others in California expressed concern about government regulations and their effect on the state's business climate.
That's the case in far Norhern California, where Dean Charlton, VP-member loan services for Coast Central Credit Union, reported, "The complaint I hear most often is worker's compensation issues. It is a problem in many areas, but especially in California. Some businesses' costs have tripled or quadrupled in one year. This means the owners have to scramble, because those costs must be paid up front."
As a result, the business owner must pass along the costs to customers, Charlton added.
Negative Business Climate
At Members Business Services, the CUSO of San Bernardino, Calif.-based Arrowhead Credit Union, CUSO President Steve von Rajcs decried the "negative, anti-business climate created by the state government." He said taxes, worker's compensation costs, and numerous rules and regulations that are "business-unfriendly" are taking their toll.
"People are talking about leaving the state and opening in Nevada or Arizona," he said. "In California, legal and regulatory requirements make it difficult and expensive to do business."
Of course, those on the other side of that fence say they have concerns of their own. Desert Schools Credit Union's Murray reported Arizona has had issues with commercial insurance. He said both property and liability insurance are very expensive and difficult to obtain.
Harborstone's Renforth said residents in the Evergreen State are not immune, either.
"Every small business is talking about increased medical insurance costs for employees," he said. "The national increase is 18% per year, but, in Washington, it is 23% per year. If that keeps happening, many businesses will be out of business, or they will have to stop providing health care benefits. They are suffering greatly."