The Small Business Administration was founded in 1953 to support entrepreneurs and small businesses with the goal of “maintaining and strengthening the nation’s economy by enabling the establishment and viability of small businesses.” For many small business owners, administration support is most evident in the SBA-guaranteed term loans that allow lenders to help growing small businesses.
Helping The Recovery
Members Choice Credit Union ($455.6M, Houston, TX) is a state-chartered, community credit union that has served the Houston area since 1941. It launched its SBA lending program in 2009 in response to the financial crisis. At the time, many banks were pulling back on business lending and reducing businesses’ lines of credit, which created a need in the community and an opportunity for the credit union.
“We had members and non-members knocking on the door asking if we did business lending, which told me there was a market demand out there,” says Steven Gilman, CEO of Members Choice.
Houston is the fourth-largest SBA district in the nation. The area has many SBA lenders, and Members Choice has been among the top, and one the few credit unions, SBA lenders in the Houston market for the past two years.
“We have a long list of borrowers who were frustrated with their inability to get a business loan in the Houston market,” says Steven Gilman, CEO of Members Choice.
Investing In The Right Expertise
To get the business lending department up and running, Members Choice brought on two key hires, Bruce Hurta and Pat Harris. Hurta — who has worked with community banks, a lending startup, and as a bank examiner — has extensive experience in SBA lending and joined the institution as business lending manager. Pat Harris — who brought experience in underwriting, closing, and packaging loans — came on as the business lending administrator.
“You have to understand the market value of bringing in SBA expertise and be willing to commit to that,” Gilman says. Gilman himself has past experience in business lending, which gave the new additions confidence the credit union was in business lending for the long-term and understood what was necessary to be successful. In addition to identifying and recruiting the right outside talent, the credit union invested in a new system to lay the groundwork for a strong operation and sought the help of a lending CUSO for servicing, underwriting, and SBA requirements.
“Using the CUSO and having another set of eyes helped the board to feel comfortable,” Gilman says. “And then, of course, the SBA loans initially had to be sent to SBA for approval. We have since achieved preferred lender status because we did enough loans and SBA is now comfortable with our underwriting.”
The CUSO was an important resource for Members Choice as it established its own track record, but the credit union is now able to independently work its SBA loans, which enables it to move loans more quickly through the pipeline.
Getting The Business
Some business lenders combine marketing and business development with administrative tasks such as underwriting, processing, and closing. At Members Choice, the two roles are separate.
“I’ve found switching from marketing tasks to administration tasks wasn’t the most productive for me,” Hurta says. “Being able to focus on bringing in business all the time, every day, I come up with ideas that I’m surprised at some times.”
The four-person team at Members Choice includes two positions completely focused on bringing in new business. Those positions have evolved into a mechanism to develop deeper relationships with area business owners who can refer business to the credit union. For typical commercial customers, most financial institutions focus on serving all the financial needs of the business. However, SBA lending tends to be transaction-based because businesses only qualify for the program two to three times before graduating to conventional financing.
“By handling the transactions in the most expedient and effective way and treating the customer right, we’ve built relationships at the credit union without even focusing on it,” Hurta says.
Hurta maintains an SBA lending blog, blasts emails, and attends local business gatherings to spread the word about Members Choice’s SBA lending. He is also involved in several chambers of commerce and business organizations within the community. The credit union’s program has been featured in local publications including The Houston Business Journal and Small Business Today.
Achieving Results And Maintaining A Market Niche
Under the SBA program, the credit union has originated 78 loans for slightly less than $60 million. It has had to charge-off one loan that, after the SBA guaranteed coverage, cost the credit union $9,800. Even small losses, however, underscore the importance of expertise and attention to detail.
“If you don’t service [the loan] properly, you don’t document it, you don’t follow up properly and there’s a loss, SBA will pay only some or none because you didn’t follow the program,” Gilman says.
Members Choice’s original business plan called for $10 million a year in SBA loans; it has since expanded the program as a result of its larger-than-anticipated success. Unlike other institutions that focus on larger commercial loans, however, Members Choice has stayed true to its SBA niche and has become well known within the community. This has allowed the credit union to make more loans without taking on undue risk.
“If you’re doing member business lending, the regulatory cap is 12.25% of total assets; that’s about a $55 million cap,” Gilman says. “Our regulators only count the unguaranteed portion of our SBA loans, which represent typically about 25% of the principle.”
The economy has improved since 2009 and banks have returned to business lending, but Members Choice is still doing well because of the relationships it has built and the team it has assembled. That team recommends SBA lending for credit unions that are willing to undertake a not-so-simple endeavor. Members Choice invested early in terms of talent, experience, and resources. Without such an investment, the business lending team would have had a long and difficult road to success.
“There is a lot of complexity around the standard operating procedures that are required by SBA,” Gilman says. “I recommend either hiring someone or partnering with a CUSO who has a full and deep understanding of the SBA programs and will stay on top of the standards, which change on a regular basis.”