Despite the 12.25% “cap” on member business loans, 2006 was another bumper year for credit unions in that sector. Credit unions originated more than 73,000 member business loans totaling just more than $13 billion. Outstanding member business loan balances increased nearly 26% in 2006 to total some $27 billion.
Small businesses drive the economy
It is no wonder that credit unions have found a new focus on helping small businesses get off the ground. There are approximately 26 million “small businesses” in America. They account for 98% of the total number of businesses and 97% of all U.S. exporters. Small businesses are at the forefront of change and account for 80% of all new innovation. While small businesses employ just more than half the workforce, they create 75% of all new jobs. Overall, small businesses contribute 52% of the national Gross Domestic Product. It is hard to be actively involved in any community without running into the financing and cash management needs of small businesses. The rapid advances in computer technology that we have seen in recent years have led to huge gains in productivity but have also changed employment patterns. More credit union members are finding themselves displaced from large corporations or municipal employment, and many are now looking to form their own small businesses. Credit unions definitely have some competitive advantages. In general, credit unions seem to be more geared up for the smaller business loans that banks don’t seem to want to take on. This is clearly evident when we compare the average balance of SBA loans originated by credit unions to the much higher average of the banking industry.
More credit unions are becoming involved
Small businesses have a wide range of financing needs: Revolving Lines of Credit, Corporate Credit Cards, Equipment Loans, Business Acquisitions Loans, and Real Estate Loans. On the other side of the ledger, small businesses also need business accounts and cash management services. In fact, many credit unions use the lending side of the business to get to the business accounts. A working capital line, corporate credit card, or small equipment line may well be the point of entry. Nearly two-thirds of all the business loans on credit union books, however, are collateralized by real estate. While there are a number of credit unions originating large commercial real estate loans, most typically, these loans are made to finance the borrower’s business premises, carry a personal guarantee (recourse), and are repaid out of the earnings of the business.
As of December 31, 2006, more than 1,900 credit unions had MBLs on their books and nearly 400 credit unions had a portfolio of at least $10 million—more than four times as many five years ago. Not too shabby at all! MBLs do require an experienced underwriter and the servicing is greatly different than a typical consumer loan. Consequently, many credit unions utilize a CUSO, their own specialist unit, or one sharing costs amongst several credit unions, to underwrite and service business loans.
Looking to the future
While most credit unions can probably grow their member business lending activities without the need for asset securitization, the development of this market will certainly be an extremely positive factor. If activity continues to grow rapidly, we will eventually have to sell excess production outside the system. There are several credit unions, CUSOs, and third-party vendors currently looking at developing capabilities to securitize credit union-originated commercial real estate loans, WesCorp included. In addition to looking at the development of secondary market conduits for both loan participations and whole loans, WesCorp is planning to assist credit unions in underwriting and originating these loans. We are also actively partnering with originators to bring liquidity to the non-guaranteed portion of SBA 504 loans through securitization. In fact, we have invited Kent Moon of Member Business Lending LLC to discuss growth opportunities in SBA 504 loans at our forthcoming Credit Union Outlook conference in Las Vegas, September 17—20. This is open to all credit unions. Hopefully you can join us.
WesCorp is America’s largest corporate credit union with approximately $30 billion in assets and more than 1,000 member/owner credit unions throughout the United States. If you would like to learn more about Credit Union Outlook or any other aspect of WesCorp’s commitment to assist credit union education on small business lending, please call (800) 442-4366, or visit www.wescorp.org.