Many credit unions are exploring business lending programs to better serve their members but balk at the initial set-up costs. Business lending grew 35.7% in the past year with 1,683 credit unions engaged in business lending as of the first quarter of 2005. The start-up costs, however, can be significant. Pat Spencer, credit union solutions manager at Baker Hill told the Credit Union Times that he estimates that it costs $250,000 to $500,000 to properly implement a program. Individual credit unions interested in business lending, therefore, need to consider the economics and evaluate launching their own program versus joining a business lending CUSO.
There are several advantages of joining a business lending CUSO:
Reduced Investment: A business lending CUSO can help improve the cost-benefit equation for an individual credit union. Given that the business lending portfolio cannot exceed 12.25% of a credit union’s assets due to regulatory limits, a credit union’s upside potential may be limited. Yet, the start-up and staffing costs are significant. “Our credit union realized that we could not begin a business lending program on our own,” said Larry Knoll, CEO of Midwest Financial Credit Union ($186 million in assets, Ann Arbor, MI) and a partner of the Michigan Business Connections CUSO. “Collaboration is a critical element of a CUSO, and we can learn best practices from our counterparts.”
Shared resources: A business lending CUSO provides credit unions with the ability to share resources and the costs associated with them. Credit unions in the Northeast Member Business Services CUSO, for example, share the fixed costs associated with loan underwriting. Northeast Member Business Services uses an electronic credit scoring model and has an employee verify the report and generate the paperwork for participating credit unions. The credit union’s loan committee, typically comprised of senior executives, then makes its own decision based on the CUSO’s recommendation.
Access to expertise: Business lending requires a significant degree of knowledge and expertise that credit unions may find difficult to develop in-house. A CUSO enables an individual credit union to share this resource. A CUSO also ensures that the commercial loan officer has greater earning potential since he/she serves the needs of multiple credit unions. “If the commercial loan officer leaves, not only will he/she bring the business relationships with them, but also it will create a void for the credit union in terms of administering a portfolio without experienced staff,” said Mark Kilian, CEO of Community Business Lenders, a CUSO owned by the Iowa Credit Union League and two Iowa credit unions.
Strengthen PFI Relationship: Offering business lending increases the likelihood that the credit union will become the primary financial institution for the member. 89% of businesses have their business and personal accounts at the same financial institution, according to TowerGroup. Workers Credit Union ($500 million in assets, Fitchburg, MA), a partner in Northeast Member Business Services, developed its business deposit program before rolling out its business lending platform. “We wined and dined our original business depositors and sought to add cash management services, debit and credit card accounts, companion CDs, money market accounts, e-statements and bill pay to their overall relationship,” said CEO Fred Healey. “We were not going to announce the business lending program until the deposit program was clean as a whistle.”
While most CUSOs only have a handful of credit union owners, they often provide services to other credit unions on a contractual basis.