With the public dialogue constantly focused on the economy, unemployment, and job creation, credit unions have been focusing more on their role in providing small businesses capital to grow and flourish. It was therefore no surprise the hot topic at this year’s GAC was credit unions’ efforts to increase the member business lending cap. While those efforts progress, there are other options that allow credit unions to provide small businesses with needed capital.
The Small Business Administration (SBA) is one resource that helps credit unions diversify their loan portfolio and explore business lending. Moreover, SBA-guaranteed loans reduce risk and can be sold on the secondary market, which provides credit unions greater flexibility. Callahan & Associates talked with John Wade of the SBA about opportunities for credit unions to expand their business lending footprint.
Has the SBA seen different trends in loan volume between banks and credit unions?
JW: In the past two years in particular we have been interested to see what kind of lending activity we are getting from credit unions vis-à-vis banks because we recognize many of the larger institutions in the banking side of our practice have pulled away, at least had pulled away until we offered our 90% guarantee.
Credit unions also pulled back, but they didn’t pull away as much because they are not seeing the same kind of conservatorship and FDIC receivership actions we are seeing on the bank side, where on any given weekend you can have three to four institutions going under.
The major banks are saying the reason their business lending has dropped precipitously is because of a corresponding decrease in demand. Do you buy this argument given the different trends between banks and credit unions?
JW: It is an open question. Are we talking about access to capital problems small businesses are expressing, which we hear, or are we talking about a lack of demand for the product the small business offers? The lending institutions have the money, they just either aren’t lending because they are tightening their credit box, or the demand for the product the small business makes just isn’t there.
Some small businesses have said anecdotally they have no trouble getting loans from their bank or credit union, but the problem is they don’t know what to do with the money once they have it because they could make more but people still have to buy it. So it is really goes back and forth daily.
Do you think there is anything about credit unions that make them particularly suited to partner with the SBA?
JW: We would expect credit unions to have a tight relationship with small businesses. You can see the benefit from a community’ standpoint because what credit unions are really designed to do is to help a specific community figure out how it is they can make it a better place for everyone involved. I have spent a lot of time thinking about and listening to the not-for-profit-but-for-service mantra espoused by many credit unions, and I think there is a niche for credit unions that recognize the value of being heavily involved in the community.
What is the SBA’s position on raising credit union’s Member Business lending cap?
JW: We know there is a movement afoot, and we expected there would be, by the credit union industry to increase the size of the limit from 12.25% to something more. And we know this is a touchy subject between credit unions on the one side and banks and thrifts on the other, especially community banks and thrifts.
One of the things we have looked at when evaluating this issue is how does it impact small business? And more importantly, how do we make sure our small business clients don’t get caught in the cross hairs of this argument? From that vantage point it is our belief that we want to see as many sources of capital for small businesses. We don’t favor any one particular type of lending institution over another; they are all 7A lender participants in our program.
Bear in mind also, the guaranteed part of SBA loans does not count toward the determination as to whether a loan receives member business lending treatment. That monetary threshold is $50,000. So, with the recent extension to the 90% SBA loan guarantees, if you were going to make a loan at a 75% guarantee, you can now make a larger loan and none of that incremental difference will count toward your member business lending limit. Also, credit unions can use the increased SBA guarantee to make larger loans that do not qualify for member business lending treatment.