According to Chinese philosophy, there are two sides to every aspect of life, and maintaining a balance between the two is key to achieving long-term harmony.
For Self-Help Credit Union ($673M, Durham, NC), this two-sided philosophy works equally well for financial services.
The credit union itself consists of two separate institutions. State-chartered Self-Help Credit Union operates in North Carolina while Self-Help Federal Credit Union — which is the result of numerous mergers and acquisitions following the great recession — serves members in California and Chicago.
Yet both of these brands draw their roots from another common ancestor still in operation today, the Self-Help Ventures Fund.
"The loan fund actually predates the credit union," says David Beck, Self-Help's director of policy and media.
The credit union funnels many common types of member business loans, including SBA 7(a) loans, through its direct book of business. As of midyear 2014, that portfolio is up 110.5% over last year, according to Peer-to-Peer Analytics by Callahan & Associates.
But when it comes to microloans, SBA CDC/504 loans, community development loans, or technical assistance, the credit union typically operates through the Ventures Fund, which is capitalized through loans and grants from various government, business, and religious organization sources rather than member deposits.
"We first analyze every opportunity as to whether it's a business loan we want to do, period," says Tracy Ward, Self-Help's chief commercial lending underwriter.
From there, some loans are booked into the loan fund because they fall outside credit union regulatory guidelines. For others, the credit union weighs a series of factors — including current liquidity levels, the convenience of terms for the borrower, and availability of third-party assistance — to determine which channel to use.
Here, Beck and Ward discuss the credit union's lending strategy and the benefits of its multifaceted model.
How did Self-Help get its start?
David Beck: There was a rash of textile plant closures across North Carolina during the 1970s and 1980s and, for a time, there was a movement to turn these locations into their own worker-owned cooperatives.
However, most often what the plant employees — many of whom were minority, rural, or belonged to other traditionally underserved borrower segments — really wanted was access to credit so that they could start their own small business.
Our organization started by making business loans through the loan fund before we were a credit union. Soon after, we realized the additional benefits of a deposit model and we've grown both business lines in tandem ever since.
How does the loan fund fit into the credit union's small business lending efforts?
DB: We've provided more than $568 million in small business loans through both our loan fund and our direct MBL efforts. Put another way, we've been able to provide funding to more than 3,400 entrepreneurs.
We book separately all loans made through our loan fund. They do not show up in our call report, but they do show up on our audit, both consolidated with our credit union loans and separately. It's important to have that broken out for regulators and for our funders because we have various covenants with them and certain specifics we need to show.
Overall, the loan fund has allowed Self-Help to take additional risks and get into new areas of need.
CU QUICK FACTS
Self-Help Credit Union
HQ: Durham, NC
12-MO SHARE GROWTH: 17.02%
12-MO LOAN GROWTH: 21.79
Obviously the government has some concerns about how much risk you take on when you have insured deposits, but as the opportunities we attract through the loan fund become safer and more routine, we can move some of that business into our credit union side.
Is the loan fund an income strategy, a philanthropic strategy, or both?
Tracy Ward: We view the loan fund as having both a philanthropic purpose that supports our mission as well as an income-based one.
We see a need for access to credit for small businesses, especially those that are minority- or women-owned, are in rural areas, need smaller loan amounts, or require a higher degree of technical assistance. We spend a lot of time analyzing whether something is a viable opportunity, and the loan fund allows us to take on that additional burden and help support these businesses.
DB: Outside of MBL, home lending is another big part of the loan fund's economic improvement mission. Most people start their business using home equity, and if you look at the home ownership rates between minority families and white families, there's about a 25% gap.
So small business lending through the loan fund drove us into home lending, as the best way to develop intergenerational wealth is through home ownership.
3 Facts About The Capital Gap
Self-Help's emphasis on underserved business borrowers is something of note for lending institutions. According to the Small Business Administration and survey data from the Kauffman Foundation, in 2010:
67.4% of white applicants were approved for a business loan versus 28.2% of minority applicants.
Male business loan applicants had a 3.7% edge in approval rates versus female applicants.
Demographics that reported higher rates of refusals were also more likely to report avoiding applying for loans.
What external sources of capital contribute to the loan fund? How do you identify potential partners?
TW: We normally have more than 10 different partnerships with various organizations, groups, and government entities at any given time, including those with specific focuses like home lending, charter school lending, and childcare lending. Each of these is a good fit for Self-Help because they have many of the same impact goals that we have in our business-lending program.
We normally have more than 10 different partnerships with various organizations, groups, and government entities at any given time.
For example, we started a new relationship this year with Elizabeth Street Capital, an organization that focuses on creating opportunities and assistance for women-owned businesses.
Another partner called the Golden LEAF Foundation manages funds coming into the state as a result of recent tobacco settlements. These funds are being used to create businesses in certain industry sectors — such as renewable energy and healthcare — that are proven to create high-paying and high-benefit jobs. The intent of the program is to transition farmers and communities that were reliant on the tobacco industry into others types of lucrative vocations.
We've also partnered with the North Carolina Rural Economic Development Center to offer a small business assistance fund that is similar to our partnership with the Golden LEAF Foundation. The primary difference is that it doesn't have the same restrictions on the type of industry that can benefit — the focus is on all small business.
How do you mitigate risk in the loan fund, particularly when so many parties are involved?
TW: Whenever we enter an agreement, we're always clear upfront about everyone's respective roles.
The fund partners themselves normally set the eligibility criteria for the loans, but all the underwriting and servicing decisions are typically made at Self-Help. We also report back to our partners on all the loans made under the program and how they're performing.
We've maintained good relationships with our partners without tying our hands with respect to our ability to work with borrowers. Because the loan fund is able to take on loans that are higher risk, delinquency rates tend to be higher than at many traditional lenders, but in part due to the flexibility we have to work with borrowers, our charge-offs are comparable.
If any of our borrowers struggle after the loan closes, we want to be as flexible as possible as long as they are communicating with us. Our loan fund partners know we need to be able to work with these borrowers in a way we see fit in order to get them back on track.
How did you uncover the opportunity in daycare and charter school lending?
DB: We've been involved in supporting the education field in different ways for quite some time. For example, when North Carolina enacted its charter school law in 1998, we helped ensure the law emphasized serving low-income kids and not just upper-middle-class day-school situations.
Most charter school laws provide per student funding but no facilities financing. So for those without some wealthy board of directors driving the school, there's a natural need that we can help fill. Since we started doing these loans in 1997, we've lent more than $210 million to 61 schools in 15 states and the District of Columbia.
TW: We also have a long history of lending to small childcare centers, targeting regions where families might not be able to afford more expensive daycare alternatives. Our charter school loans are typically booked in the loan fund while our childcare loans are now often booked in the credit union.
Another plus from a policy perspective is our ability to provide evidence that this type of lending can be done safely and profitably. There are now a lot more lenders in this space than there were when we started, which helps create even more opportunities for the communities we serve.