When Michigan State University Federal Credit Union ($2.3B, East Lansing, MI) began offering business loans five years ago, it made a conscious decision to grow the department in balance with the financial means and expertise available.
“Business loans are complicated and need oversight on a regular basis,” says April Clobes, the credit union’s executive vice president and chief operating officer.
As expertise in business lending grew, so did new opportunities within the portfolio. Today, the credit union holds roughly $60 million in MBL balances, consisting of 81% commercial real estate, 6% line of credit, 2% visa credit cards, 2% commercial vehicles, and 7% other loans.
In the first six months of 2012, MSU FCU originated roughly 3.5 times as many MBL loans as it did over the same period the year before while maintaining a delinquency rate of just 0.23%, according to Callahan & Associates’ Peer-To-Peer software.
To complement existing strengths, the institution also focuses on entrepreneur and startup lending, which is an underserved area of member business lending that has an immediate impact on the community at large. The credit union unveiled a competition in August in which credit union experts judge applicants' business plans. The credit union is accepting startUp Challenge entrants into October but will not announce the $25,000 grand prize winner until this winter, after several rounds of elimination.
Those who are not selected will still receive feedback and referrals to Lansing Economic Area Partnership (LEAP), The Small Business Association, Michigan Economic Development Corp (MEDC), and other resources that can help them address their business shortfalls.
MSU FCU has also earmarked $250,000 in funds for qualified loan applicants, including businesses it might eliminate from the startUp competition. The credit union will provide up to $15,000 for each loan at a maximum term of five years. As investing in entrepreneurship is not without its risks — according to Harvard Business School the failure for startups is 30-40% — MSU FCU prices its loans at 7% to acknowledge the extra risk yet offer a more favorable rate than a personal line of credit.
“We established the fund knowing that startups can have challenges other businesses do not,” Clobes says. In each case, the institution must determine loan decisions based on the type of business, the business plan, and the principal owner’s history and credit worthiness.
Despite the hands-on due diligence required, MSU FCU see several advantages in offering loans to local entrepreneurs. First, these loans complement the credit union’s long-standing goal of attracting, serving, and retaining young membership, including MSU graduates.
“Retaining young people and talent will help create a stronger community for the arts, culture, business, and entertainment,” Clobes says. “Our research also indicates that Gen Y is the most entrepreneurial generation of all time, but that trend is being fueled by a lack of available jobs.”
Unemployment rates for the Lansing region remain stubbornly high at 10.4%, according to the U.S. Bureau of Labor Statistics.
The credit union also offers loans to local entrepreneurs because it is more efficient for MSU FCU to meet business needs directly rather than piecemealing funds among multiple small business events, competitions, and organizations.
“We were being approached by many programs to fund their challenges and of course we couldn’t fund them all,” Clobes says. “Now all our partners may refer these entrants to our contest.”
MSU FCU is one of more than 30 credit unions in the state who have partnered with the Michigan Economic Development Corporation and the Michigan Small Business and Technology Development Center to offer more than $43 million in loan assistance to small businesses statewide, erasing some the damage caused by fluctuating auto markets during the downturn.
Activities in this hard-hit state mirror the growing wave of interest in small business among the credit union industry nationally. This summer, NCUA extended the option to become a low income designated credit union — and thus become exempt from the 12.25% business lending cap — to more than 1,000 institutions in an effort to boost loan activity.
“MSU FCU did receive the low income designation," Clobes says. "But it will be some time before our portfolio reaches more than 12.25%.”.