How (& Why) Biz Lending Has Become Popular With Borrowers And Our CU (1.7% ROA)
If you have attended a recent national conference, or have read from credit union trade periodicals, it is no surprise to you that business services and loans have captured the attention of credit unions nationwide. I consider these products the greatest opportunity since home banking/bill payment services were launched many years ago.
At our credit union, for instance, we attribute much of our 1.7% ROA to small business services.
In a recent study by NAFCU, credit unions were asked if they offer business loans. About 61% said that they do, 22% said that they intend to in the near future, and 17% said that they don't. Of those CUs that said they have not offered business loans yet, 62% said they lack experience, while 52% indicated that their board decided not to offer such loans. The same study also indicated that 36% of the responding credit unions indicated that they are qualified Small Business Administration (SBA) lenders.
Why are business products so attractive to credit unions? The simple and most compelling reason is that credit unions can be there for their members who own small businesses. Why turn these members over to a bank or other competitors? Why not serve these members with products that are profitable and sustainable? Credit unions can make a difference in this marketplace. The banks are serving these small business owners, but with high fees and high-rate business credit cards.
How does a business line of credit with interest only for the first five years and at prime plus three sound to a business owner? From the CU's perspective, this line of credit can be guaranteed by the SBA for up to 50% of the loan amount. Now, how is that for managing credit risk on these unsecured lines of credit? This product absolutely blows away a bank-issued 21% business credit. Credit unions can provide better services to the small business owner, and business owners want to deal with credit unions.
How are these products also good for the credit union? Credit unions of all asset sizes have been struggling to hit a return-on-assets goal of 1%. The average ROA ratio at midyear for all credit unions is 0.66% and the year-end ROA for all credit unions is expected to be 0.83%. Without sufficient net income growth, CUs may be hindered in terms of growth and services offered to members. Loan growth (the primary driver of income) has been 10.1%, 10.6%, 6.5%, and 6.2% for the years ending 2004, 2005, 2006 and 2007 (NAFCU Forecast), respectively.
How can credit unions respond to the projected significant decrease in mortgage fundings and renewed competition by the automobile manufacturers with 0% interest programs? Small Business Loans with SBA guarantees are not only more profitable than mortgage and car loans, but when selling other business products and services, offer the credit union a deeper relationship with their business members.
What does the average small business member look like at one of the participating credit unions, Mountain America Credit Union? The average business loan size is $40,000 and the average business deposit is $15,000. Average retail loan balance per household with a business relationship is $28,764 compared to $14,246 without. Average services per household with an SBA loan is 4.80 compared to 2.80 for a household without. These business relationships compliment the personal accounts and loans that we already have with our members that are small business owners. Much of Mountain America's 2006 annualized 1.7% ROA, 20% loan growth, and 19% share growth is attributed in part to the launching of business loans and services during 2005 and 2006.
We have learned that the most successful credit unions in offering business loans and services had received a 100% commitment from executive management and the board prior to launching this initiative. As Art Carney said in the "Honeymooners," "As we say in the sewer, unless you're willing to go all the way, don't bother putting your boots on in the first place."
Don Clark is Executive Vice-President with Mountain America Credit Union, Salt Lake City, and can be contacted with comments or questions at dclark
WHERE TO GET MORE
Subscribers to the Credit Union Journal can get an enhanced version of the advice and strategies shared here by Don Clark, including a list of 10 reasons why Mountain America CU believes it has done so well in business lending, by going to www.cujournal.com and typing "Don Clark" in the search engine.