Business Lending a Bonus for Both
Consolidation in the community bank sector has created an opening for credit unions to step in and serve the needs of small businesses, suggests Ed Sahakian, VP/business and home loan services with $830 million/79,000-member Ventura County Credit Union.
The last remaining community bank of the 20 that once served Ventura County, Calif., was acquired by a big bank in 2017. “We want to work with small business owners who had been community banking customers and appreciate that personal relationship,” Sahakian says. Toward that end, Ventura County CU has become the highest volume U.S. Small Business Administration program lender in its market and has grown its commercial loan portfolio to more than $45 million from $1.8 million in 2014.
Sahakian joined the credit union in February 2015 and hired another local commercial lender to help ramp up business lending by building on their familiarity with and reputation in the local market. Their strategy has been to bring in big commercial real estate loans to offset lower-yield loans to small businesses.
The credit union has made loans up to $7 million and was working on a couple $10 million projects late last year. Those big loans are typically shared in participations with other credit unions. At the same time, Ventura County CU has made small business loans in the range of $5,000 and $10,000.
“Those small loans are not cost-effective. They’re a time-consuming, long-term economic seed-planting project,” Sahakian says. “But from our viewpoint, that’s what we’re here to do.”
For example, the credit union worked with a local salon owner for two years, referring her to the SBA SCORE mentor-match program for guidance in developing a business plan and later working with the borrower to develop strategies and adjusting her financing to help deal with cash flow issues. Today the business is thriving and employs five stylists.
“You can’t make that type of loan if all you’re focused on is the bottom line,” he says. Still, taking advantage of opportunities to offer small commercial loans makes good business sense for credit unions and their communities.
Small Businesses Appreciate the ‘Credit Union Way’
$5.1 billion, 385,000-member Lake Michigan Credit Union has developed a thriving business loan program, but establishing its name as a commercial lender with larger companies remains a work in progress. On the other hand, says Jim Maskell, SVP/commercial lending with the Grand Rapids, Mich., credit union, “small businesses naturally gravitate to us.”
As many banks have “upstreamed” their commercial lending focus to pursue middle-market and larger clients, smaller businesses have fewer lenders competing for their business, Maskell says. As a result, “small businesses are much more open to taking their loan business to credit unions.”
“Credit unions have a unique opportunity to fill a void in the business community,” agrees Joey Duckworth, VP/marketing with Member Business Lending, Draper, Utah. “A large percentage of small businesses struggle to gain access to the financial resources they need to be successful. There’s not a lot of return for big commercial lenders in this market. Mom-and-pop operations may be forced to rely on personal lines of credit and credit cards to finance their businesses, which creates a lot of complexity and adds unnecessary stress.
“As not-for-profit financial institutions, credit unions have a goal to serve their communities and help grow the economy, which they can do through small business lending,” he adds. “There’s still a profit to be made when these loans are priced correctly.”
Small Business Loans Spread the Risk
Another advantage of small business lending is that generating more loans at smaller amounts—“a more granular loan portfolio,” as Maskell puts it—helps spread the risk.
“No matter how smart you think you are, things happen in the business world. It’s a large, evolving sector. You underwrite a loan at a single point in time when the outlook is great,” he says. “But if the business loses a big customer, the industry shifts or government regulations change, then you have problems. No matter what your spread is, your ultimate earnings boil down to one question: How much did you charge off?”
Lake Michigan CU has recorded no business credit losses in its eight years in this sector; it doesn’t even have a business loan 30 days past due. “If you can hold those metrics, you’re going to make a lot more money than a bank chasing the larger credits,” he contends.
Small Businesses Can Be Big Business
Credit unions may find themselves facing challenges and opportunities in direct opposition to those of banks with established business lending programs, Maskell suggests.
“In a banking environment, you can win the commercial loan, but the cross-sell becomes challenging—getting operating accounts, residential mortgages, car loans and employees’ personal accounts,” he says. “With our credit union’s reputation for great personal service and lending, the sell-through is dramatically easier. It can be a challenge to get the commercial loan, but once we do, it’s difficult for a bank to come in and take the relationship away.”
Small business lending can be a productive path to increase deposits and other business and personal accounts, Duckworth agrees. A small business uses, on average, five products for every one product a consumer uses—and that doesn’t include building personal banking relationships with business owners and their employees.
He cites the example of credit unions hosting events for business borrowers to thank them for their business. “I have seen them sign up every single employee at those events as new members—and then set up direct deposit of their payroll checks through their employers,” he says.
Ventura County CU committed to offering business services after a member survey conducted five years ago showed that 15 percent of its members were small-business owners. “These are people used to getting great service from the financial professionals at their credit union, but we were missing an opportunity to serve their business needs,” Sahakian says. “They may not even know what capital is available for their businesses. When they go to a large bank, they may get the message, ‘We don’t have time for you.’”
The next step for the credit union will be to introduce online options for small businesses to manage their finances, like merchant card services, remote deposit capture and treasury management services at lower fees than other financial institutions charge.
“We’re not going to require small businesses to keep $50,000 in a bank account just so they can write a check for free. That’s not where we’re at,” he adds. “We’re here to help small businesses have access to their capital to make it easy and convenient for them to do business.”
Karen Bankston is a long-time contributor to Credit Union Management and writes about credit unions, membership growth, marketing, operations and technology. She is the proprietor of Precision Prose, Eugene, Ore.