PORTLAND, Ore. - The commercial lending market remains strong and growing for credit unions, with banks helping to send business CUs’ way, according to the leaders of four CUSOs.
The opportunities for credit unions, the CUSOs told Credit Union Journal, go beyond just the loan dollars and extend into additional revenue and even membership growth.
“The willingness and ability of credit unions to lend to those smaller businesses that banks are turning away bodes well for the industry now and down the road,” offered Larry Middleman, president of CU Business Group here. “We are establishing some really good relationships now compared with a few years ago when it was tougher because banks were more free-wheeling on the lending side.”
Middleman said CU Business Group, which serves 260 credit unions in 30 states, has seen business increase by 50-60% in 2008 over late 2007 levels. The additional activity, which almost all of the CUSOs that spoke with Credit Union Journal reported they are seeing, does not come without risk. All CUSO leaders agreed that while there is not a noticeable decline in the quality of applications, diligence and sound underwriting standards are critical.
“We are not overly concerned,” Middleman said. “Sound underwriting principles will carry you through good and bad times. Right now you have to pay a little more attention to details.”
Middleman warns that credit unions should not hold a “panacean” view about commercial real estate. “Just because you have a building for collateral doesn’t mean the loan is good as gold,” he advised. “So you should be paying more attention to the worst-case scenario with a piece of commercial real estate and ask: ‘If I had to take it back, what is the potential for this real estate?’ Just pay attention to location and to your annual reviews. Make sure you’re doing due diligence along the way to avoid big problems.”
In South Jordan, Utah, Kent Moon, president and CEO of Member Business Lending (MBL), said its lending volume is up 28% over last year. He agrees that sound underwriting will keep CUs away from trouble, but adds they should be wise in the business targets they choose.
Opportunity To Increase Market Share
“This is an incredible opportunity for credit unions to increase market share,” said Moon, whose CUSO serves 28 credit unions. “At MBL we are encouraging our credit unions to increase share and pick up some of these quality small business loans that banks, as usual in a down economy, tend to ignore. This is an opportunity to capture small business for the credit union industry.”
Small businesses traditionally have relied on banks to provide capital, specifically working capital and long-term capitalization, Moon explained. In a weak economy, the long-term capitalization market thins out.
“In a down economy, traditional businesses stop capitalizing heavy equipment and long-term fixed assets. In this kind of economy you don’t move into heavy equipment and large real estate acquisitions because businesses are not seeking to do so. You want to be aware that this is a cash-flow focused environment. And you move toward businesses that need to have that cash-flow support…Credit unions who serve what I call the underserved small business should be looking at businesses in need of working capital lines of about $350,000 and less, and use government guarantees to support those revolving lines.”
Tough Times Lead To Early Stage Companies
Tough times also lead to the entry of more “early stage” companies, Moon says, which need CU guidance. “Some of these companies will have to be coached on how to apply for a business loan. It’s not that the quality of the application is down right now, but the tenure of your applicant is different than during an economic upswing.”
Moon contends that the extremely poor quality applications rarely come the credit union’s way.
“Hard money deals are not handled by the credit union,” he said. “Hard money deals are desperation money and consequently go to hard money or subprime lenders.”
Murray Halperin, SVP of marketing and business development for CU Business Capital (CUBC) in Miramar, Fla., acknowledged that business lending at his client credit unions across the country is flat, but expects that will change.
“This is a big opportunity being handed to CUs on a platter by bankers,” Halperin said. “Banks are creating a huge void, one we can walk right into and build our market.”
CUBC is being aggressive, piloting an innovative program through which a credit union’s commercial and business members can extend the CU’s financing to that company’s own clients in much the same way auto dealers provide indirect lending (see related story). The CUSO is also stepping up marketing.
“For each of our credit unions we get a list of all the businesses within a two-mile radius around their branches,” Halperin said. “Every month some of these businesses get a marketing piece from the credit union in conjunction CUBC. The local sales groups from our company and the credit union knock on doors, and our application volume increased last month.”
Halperin said a key to the marketing is getting more than loans by capturing deposits, other services, and even SEGs.
While the quality of applications has been good at CUBC, Halperin is another who believes in targeting. “Go after the businesses with established track records and avoid industries hit hardest by recessions, like restaurants.
Halperin also advises looking outside existing members.
“If you are only concentrating on your members your credit is going to be much weaker,” Halperin said. “Throughout your membership there is quite of bit of opportunity. But if you go out into the community you can choose the type of industry, how long they have been around, their annual sales …You’ll tend to find much better credit approaching it that way.”
In Texas, due to an economy that’s faring better than the national average (CU Journal, April14) banks are not turning away small business loans, according to Lewis Aven, CEO of CU Business Solutions in Austin. But that hasn’t affected the volume of loans coming through the 15 Texas credit unions the CUSO serves.
“Our CUSO is in its third year and we are seeing almost a doubling of the loan production today compared with when we started,” Aven said.
The business is resulting from strong relationships credit unions are developing in their communities. “I think the credit is good, and we’re not seeing poor quality applications,” Aven explained. “I think that’s because our credit unions are doing a better job recognizing the ones they can support. They are recognizing the risk and what they have to do to get the deal done.”
Go After The Business Relationship
The deals, Aven said, are bringing in more than loans. “I have always coached my credit unions to go after the business relationship and not to fall into the trap of being a transactional lender, getting just a loan at the end of the day. We need to build relationships with the businesses and provide deposit services. Those credit unions that follow this principle will be surprised by what their business loan portfolio looks like in five years. Attracting those mom and pop businesses and those middle market companies that are still small enough to use traditional financial sources in time will fund your loan portfolio for you through their deposits.”
CU Business Group’s Middleman agrees, saying the time is right for credit unions to be aggressive about asking for deposits when they close a business loan.
“There is no reason to have to take the nice route and ask businesses to bring deposits with them,” Middleman said. “Credit unions need to say that along with the lending relationship we expect your deposits. It’s part of the package. We are in a strong position today because there is less capital available for businesses and we can make those kinds of demands.”
