SAN ANTONIO-Just as FHA and VA mortgage volume has spiked during the economic slowdown, business loans backed by the Small Business Administration are getting more looks from credit unions as well.
"You have the guarantee from the U.S. government and in many cases that's up to 90% now," said Don Clark, SVP, The Credit Union Group at SWBC. "That's a tremendous guarantee, a great credit risk mitigation for doing those types of loans."
While the cap could drop back to its historical average of 75% as the economy recovers, the guarantee is on a going-forward basis, which locks-in the higher insurance for loans currently being made. In addition to the government backing, SBA loans provide a specific strategic advantage for credit unions-the guaranteed segments of those loans do not count against the member business lending caps, added Clark.
That provision means credit unions can make more business loans than they could otherwise; a critical advantage in an environment with low investment yields, shrinking revenue streams and a surge in deposits.
The popularity of SBA loans has led to a corresponding decreased demand in the participation market, Clark pointed out, but it's not simply the guarantee that makes these loans desirable. Clark explained that there is a big difference between commercial investors and small business members and the walletshare numbers bear that out. The number of products and services per borrower that has a commercial property loan with a credit union is just 1.3, while a small business member averages between four and five products with the CU.
Focusing on direct member business lending, specially through the SBA program, provides strong opportunities for growth, new revenue and new members, Clark argued.
Though the market does have some risks, namely that the majority of new businesses fail and that the full value of SBA loans is not insured, the government program also provides a measure of security against future fiscal policy. With interest rates at all-time lows, there is little room for them to move but up. Unlike the VA and FHA programs, SBA loans are variable rate, so there is "no interest rate risk," Clark noted.
