When you think of venture capitalists, credit unions don't typically come to mind. But two local credit unions here are seeking to change that.
Sunmark FCU and State Employees FCU have joined with nine banks at the Schenectady Community Business Center to create a $550,000 venture fund to help small businesses both start-ups and more established firms with so-called "gap financing," a somewhat riskier aspect of commercial lending.
"Let's say a business needs about $400,000 in funding for a particular project, and they've already got $350,000, but they still need that last $50,00 that's what gap financing is for and it's typically the riskiest kind of lending," explained Sunmark FCU CEO Bruce Beaudette. "That's what this fund is for."
Credit unions aren't generally known for providing gap financing, but by joining with a number of other financial institutions, SEFCU and Sunmark are able to participate without quite as much risk as if they attempted to do these kinds of loans on their own, he added.
To put together the group of financial institutions, the SCBC sent out a letter to 14 institutions that had a presence in Schenectady County. "SEFCU and Sunmark were the only two credit unions in our area that offer commercial loans," said Lisa Malone, SCBC director of business development. The 12 other financial institutions were banks; of the three that declined to participate, one really didn't have much of a presence in the county, Malone noted, adding that she hopes the other two may consider joining in the future.
Each of the 11 financial institutions ponied up $50,000 for the fund, and each institution will have a seat on the fund's board, which will determine which loans to make.
"It's sort of a tougher sell to credit unions because they don't get CRA credit for doing this," Malone observed. "But I've been really impressed with them. They really are community minded, and even though they are much smaller than most of the banks, they're still putting up the same amount of money."
SCBC has two funds of its own that it uses to help get new businesses started. The organization acts as an "incubator" to help new businesses come to fruition. But neither of those funds is allowed to provide gap funding, so those cases would be referred to the venture fund.
Malone said she expects that most loan applications will come from groups referred by one of the financial institutions themselves. "Anyone going through this program has to be sponsored by one of the participating financial institutions," she told The Credit Union Journal. "And whoever brings that group to the table has to have loaned that group at least as much as the gap loan they're looking for."
For example, if one of the institutions makes a regular commercial loan to a business, but that business still needs additional funding, that institution can refer the business to the venture fund. The venture fund board can then determine if it wishes to provide the gap financing, which cannot exceed however much the sponsoring institution has already loaned to the business.
For SEFCU's part, getting involved in the venture fund was a natural fit, according to Michael Castellano, COO and CFO of the $1.1-billion CU.
"Technically, we are a SEG-based credit union, but we are much more of a community-based institution than our charter would indicate," Castellano suggested. "We have the entire city of Schenectady, and we were the first credit union in the area to take in an underserved (field of membership). We are right in the heart of an underserved area."
In fact, the SCBC is housed in the same facility as SEFCU, so the two organizations have worked together in the past.
With an already-solid member business lending program, SEFCU's motivation is to continue building on its reputation as a strong supporter of the community.
SunMark also had an existing relationship with SCBC. "I had worked previously with SunMark on a loan for a small, relatively new business," said Malone. "At that time I met a number of managers and they expressed an interest in helping with it."
With a community charter, a mission to serve the underserved and several SBA and other member business loans in the fire, SunMark saw the venture fund as being a logical next step. "It fits our business lending strategy," Beaudette noted. "We've been doing business loans for about two years now, but this is our first foray into this type of venture. It's an area that we really normally don't get into. This is such a new venture. We really didn't do this for the return. Really, we'll look for preservation of th eprinciple, and then any return will be gravy. This is just the right thing to do."