A small but growing number of credit unions are making business loans.

And bankers used to competing with the cooperative organizations are running up against them on the commercial side, as banks target increasingly smaller businesses.

"They don't advertise it, but I know they do it," said Frank Sullentrop, chief executive of the State Bank of Colwich in Kansas.

For example, in the past 18 months two business State Bank customers have paid off loans - each "in the high five figures" - courtesy of financing from a local credit union, he said.

James Carey, chief executive of Slade's Ferry Trust Co. in Somerset, Mass., has similar gripes. Some state-chartered credit unions in the state have a good book of business loans, he said.

"There is a high concentration of aggressive credit unions here," he said. "Some posture themselves as banks and have commercial lending departments."

Despite such statements, credit unions are much less of a competitive threat than other nonbank rivals. At the end of 1995 only 1.1% of the industry's $198 billion in loans are designated as business loans. That figure, from the Credit Union National Association, doesn't capture personal loans used for business purposes.

Unlike banks, credit unions have restrictions on the quantity of business loans they make, generally forcing them to make only small commercial loans.

Although the proportion of designated member business loans has remained consistent over the years, the number of institutions involved has gone up. At the end of 1995, 12.4% of credit unions made member business loans, up 22% from 1993, according to the industry association.

The proportion of larger credit unions - those with $50 million or more in assets - offering business loans is even higher, according to the trade group.

"It's not a large percentage, but it's growing," said Cynthia Glassman, a managing director at the Washington-based consulting group Furash & Co. "They concentrate on the microbusinesses."

Commercial lending has been the bread-and-butter of Progressive Credit Union, founded nearly 80 years ago in The Bronx by businessmen who couldn't get credit from banks.

Now in Manhattan, the credit union lends chiefly to taxi drivers so they can buy the medallions that permit them to operate in the city. It also finances hobby shops and car washes, and for the past two years has participated in Small Business Administration lending, credit union treasurer Robert Familant said.

Virtually all the credit union's $150 million loan portfolio is in commercial loans, Mr. Familant said.

Oftentimes, Progressive lends to immigrants who start out as taxi drivers and later open different businesses, Mr. Familant said.

"We have many members with an entrepreneurial drive," he said. "We have tried to work with them as they find their level of water."

Across town, in the gritty Brooklyn neighborhood of Bedford-Stuyvesant, Central Brooklyn Federal Credit Union frequently makes unsecured personal loans that members use to finance their microbusinesses, said Errol Louis, manager of the three-year-old institution. The businesses create wealth and jobs in the community.

"If someone needs a loan for the renovation of a storefront sign, it could be on their personal credit and maybe that of some co-signers," Mr. Louis said of the credit union's approach. "We especially want to help people connect with larger outside markets."

For example, the credit union has given a line of credit to one Bed-Stuy resident that operates a home health-care service, Mr. Louis said. Other projects have included helping a tie maker buy material from Italy for samples, and lending $8,500 to a woman who wanted to renovate a beauty shop.

The credit union has a loan portfolio of $2.1 million, about 17% of it dedicated to personal loans used for business purposes, Mr. Louis said. The largest companies have about $1 million in annual revenues.

"Generally our mission is to help families rather than businesses, but often that amounts to the same thing," Mr. Louis said. "We don't want something as silly as $8,500 standing between someone and her dreams."

Xerox Federal Credit Union in El Segundo, Calif., found itself financing the start-up ventures of displaced employees.

In wake of massive layoffs at Xerox Corp., the $338 million-asset credit union has provided seed money to members that wanted to go into business for themselves.

"I don't look at it as a business situation; I look at it as a member loan," said Kevin Foster-Keddie, chief executive of the credit union. He estimated that up to 5% of the organization's $289 million loan portfolio was used for entrepreneurial activities.

Mr. Foster-Keddie said the credit union doesn't yet do lending secured by business assets, but might in the future.

One of the country's more innovative credit unions, Xerox Federal is involved with small businesses on other levels. For example, it provides management services to Hanin Federal Credit Union in Los Angeles, which finances Korean-American merchants.

Also, a subsidiary of the credit union is working on running the benefits programs of a handful of small companies that are in its membership field, Mr. Foster-Keddie said.

In Poughkeepsie, N.Y., Hudson Valley Federal Credit Union is weighing involvement in making business loans to members in light of bank consolidation.

"We know there's a niche to be filled and we're looking at in terms of our strategic plan," said chief executive Charles Cockburn.

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