Hunting was a crucial skill for our early ancestors, but it was agriculture that provided the stable subsistence needed to thrive as a species.
When it comes to member business lending (MBL), many credit unions are facing a similar turning point in their evolution: Do they focus only on the same loans as every other hunter? Or do they cultivate smaller, more abundant loan opportunities that will help a larger group of people?
The Case For A Small Business Mindset
The cooperative financial industry has posted strong annual MBL growth in recent years, including the 13.1% annual increase achieved in second quarter 2014. This tops the respective 8.4% growth achieved by all banks in the United States over the same timeframe.
Hunters Versus Farmers
Banks still dominate business lending. However, credit unions have an opportunity to hone in on the small business borrowers that for-profit lenders often overlook.
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However, when viewed holistically, credit unions' nearly $43.6 billion in MBL balances held at midyear is just a drop in the bucket compared to the nearly $1.4 trillion held by banks.
For their part, these for-profit lenders are favoring the hunter route, pursuing prize game that offers the largest returns. According to data from the Institute for Local Self Reliance, loans made from 2000 to 2012 to large businesses were up 36% at banks. Conversely, small business lending fell 14% in the same timeframe, and microlending dropped a precipitous 33%.
Performance data from Peer-to-Peer Analytics by Callahan & Associates indicates that some cooperatives are following the same route. The average MBL loan balance today is roughly three times what it was in 1998, the oldest year available for comparison.
In an effort to compete in the heavyweight MBL division, it can be all too easy for cooperatives to glaze over the needs of entrepreneurs, small businesses, and other underserved borrower groups that fall outside of that target market.
Although smaller MBL loans typically offer a lower rate of return, in aggregate, they can make for a steady and profitable line of business without exposing a credit union to the disastrous losses that can accompany one large MBL deal gone bad.
Outside Partners Share The Burden
Small or new businesses typically face a higher rate of failure than their established counterparts. They also often require additional assistance to gain loan approval — much less operate and grow as an organization. As such, asking credit unions to tackle these types of loans on their own is a tall order.
Thankfully, there are a number of resources whose business models revolve around providing this type of assistance. Many even provide financial boosts, community connections, and a pipeline of vetted candidates that make serving small businesses easier and safer.
For those businesses that still fall outside of an organization's lending wheelhouse, options such as venture investments or direct philanthropic support from the community are an effective stopgap for capital needs.
Lend To What You Know
New lenders in the commercial space are developing niche expertise.
According to Businessweek, Whole Foods has lent more than $10 million to local food growers since 2007. And Amazon's small-business lending initiative is currently providing funding to high-volume sellers who have a strong relationship with the website, reports Forbes.
Bridge Credit Union ($45.7M, Columbus, OH) adopted this specialized approach following its 2013 transition from serving a single SEG — the Ohio Department of Transportation — to all of the region's private transportation industry.
"We found out there's a huge shortfall of over-the-road truck drivers," says Keri Moser, the credit union's vice president.
This discovery led Bridge to develop a relationship with Roadmaster, one of the largest driving schools in the nation, and create an unsecured loan to fund the cost of a commercial driver's license (CDL) certification. The credit union also has a burgeoning MBL program it started last year.
The credit union has held off on funding commercial vehicle or equipment purchases while it gets to know the needs of its expanded borrower demographic, which often faces higher attrition rates than other industries. However, its relationships with vehicle owner-operators could prove a valuable funnel for such loans if and when the credit union decides to move forward with them, Moser says.