As credit unions continue to struggle with loan growth, more credit unions must consider tapping into member business lending, one expert is urging.
"This is a tremendous opportunity, because banks are not interested," said Mike Hales, president of Lenexa, Kan.-based credit union consultancy Counter Intelligence Associates.
Calling himself a "recovering banker," Hales related how he had an opportunity, when he was a bank branch manager, to make a loan to Michael Tobler, who wanted to buy a small house and convert it into a sandwich shop. Because the bank had a policy of "restaurant equals 'no,'" Hales passed.
Had he simply taken the time to talk to Tobler, Hales recalled, he might have discovered Tobler already had one thriving sandwich shop and was expanding due to popular demand.
Further, he might have gotten in on the ground floor of what became the "Togo's" franchise. Hales said the lesson from his mistake is clear to credit unions.
"Business lending is not a fad, it is an evolutionary lending line credit unions need to embrace," he declared. "It is growing, but the vast majority of United States credit unions are not involved-most because they think it is too risky."
The Opportunity For Credit Unions
The opportunity for credit unions stems from the fact banks ignore smaller businesses and their needs, Hales explained.
Of the 26-million small businesses in the country (defined as $10 million or less in annual sales), the majority have less than $1 million in sales.
When banks began a consolidation drive about 15 years ago, they lost interest in making loans of less than $250,000, he said.
In addition, Hales said, loan decisions and underwriting no longer take place in branches, but have been moved to central locations.
Business Owners Demand Service
"Approximately 2.6-million small business owners change financial institutions every year because they are fed up with the service they have received.
They don't know they can come to us, and we don't know we can serve these people with the same structure we have now," he said.
There are many "new entrepreneurs" in America, he continued.
Some are college students, others are displaced employees, computer geeks and "young" seniors. "Many businesses are being started by individuals 55 to 65," Hales suggested.
Why are small business loans potentially so valuable to credit unions? According to Hales, "micro" small businesses (annual sales less than $1 million) have an average of 4.7 products, while larger small businesses ($1 million to $10 million in sales) average 5.8 products.
The average primary deposit balance of all small businesses is $67,400.
Most significantly, the credit union that services a small business gains access to the owner's family members and all of its employees.
Hales recommended two methods of getting involved in member business lending that minimize risk: entering a member business lending CUSO with one or more other credit unions, or becoming a Small Business Administration lender.
He noted the SBA opened certification to all credit unions in February 2004 with the objective of spreading allocated funds to more small business borrowers.
The SBA realized commercial banks are not interested in loans less than $200,000, and wanted to reduce its average guaranteed loan portion, he said.
