Small Business Saviors

Credit unions boost entrepreneurialism through filling the demand for small business loans.

 
 

Small businesses are a crucial force in this economic recovery, generating 65% of all new jobs and employing half of private sector employees in this country, according to the U.S. Small Business Administration. But many retailers still struggle with stagnant spending while budding entrepreneurs face a tough lending climate.

Following the recession, banks have been reluctant to lend to smaller businesses, which tend to have less profitable loans and riskier borrowers than their corporate counterparts. Credit unions have stepped in to meet the demand for small business loans by working closely with borrowers to assess their true risk and keeping member business lending portfolios diversified in several types of businesses.

 At the same time, consumers have been increasing their savings and paring back on spending, which cuts into the income of retailers. Lately, though, economic indicators suggest consumer spending is changing. In July, retail sales rose 1.2% year-over-year and analysts expect modest growth through the fall and winter, according to the National Retail Federation. And credit unions are partly to thank for the improvements as they’re boosting local retail spending with several spirited efforts.

Credit unions like Michigan First Credit Union ($623.3M, Lathrup Village, MI), Nutmeg State Federal Credit Union ($351.8M, Rocky Hill, CT), and Ohio Healthcare Federal Credit Union ($49.9M, Dublin, OH) are helping revive the small business sector through local credit card rewards programs, new business lending programs, and even “cash mob” events that drive consumers to bombard one mom-and-pop shop with numerous $20 purchases in one day.

Credit Card Rewards Funnel Spending

Credit unions have grown stagnant credit card portfolios and supported their local economy through credit card rewards programs that encourage consumers to spend at local stores instead of corporate chains. To freshen up a plain vanilla credit card offering, Michigan First Federal Credit Union launched a local credit cards rewards program that grants more points for purchases from Michigan-based businesses.

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The Experience Michigan First Rewards VISA program has revived Michigan First’s credit card portfolio, which had been flat for 10 years. The credit union grew its credit card portfolio by $1 million new balances , hitting approximately $16 million total, and opened $3 million in new card lines in the first quarter. Between  April and June, Michigan First issued more than 1,000 new cards — the majority of which went to new members — which is more than five times the credit union’s average number. Now, the credit union isreaching for $5 million in new credit card balances by the end of 2012.

The credit union launched the rewards program for members in April and extended the offer to non-members in May. To pique interest, it is tapping several marketing channels, including a local morning radio show and its own branches. Large banners at the credit union’s branches show off the card images and interactive displays featuring touch-screen kiosks allow members to sign on and choose from one of 12 card designs. According to vice president of marketingLinda Douglas, although the credit union does not yet know how many members are using the cards to purchase locally, it will start tracking Michigan spending as consumers cash in on rewards points.

“We saw an opportunity to increase our balances and we saw an opportunity to align that product with our overall support for the state of Michigan,” Douglas says. “We do a lot in the community, but this program is the first time we’ve married our community platform with an actual product itself. It was a natural fit.”

The rewards component drives business in the state as well. To incentivize local spending, members earn more value in the rewards catalog by redeeming a Michigan-based merchant gift card over a national merchant gift card. Rewards destinations include the Detroit Zoo, Grand Hotel on Mackinac Island, Michigan’s Adventure Amusement Park, and several retailers and restaurants.

Douglas says the Experience Michigan First program has supported its purpose of “giving back to the community and supporting the community.”

“It’s a major focus for us, so we put a lot of energy behind it,” she says. “It’s an opportunity in the marketplace to help spread the word about Michigan First and Michigan state. It’s definitely a growth opportunity for us.”

Jumpstart Entrepreneurs With Business Lending

The owner of a landscaping company in Rocky Hill, CT, has tripled business this year through the purchase of a larger truck and a wood chipper. Nearby, the owner of a small diner reduced her monthly payments by $600, allowing her to hire another part-time waitress. And an auto body shop owner reduced his debt enough to hire another mechanic to increase his business.

These three business owners all received loans this year from Nutmeg State Federal Credit Union, which launched a business lending program targeting small businesses in January.

“In our area, there were no other credit unions that do the type of business lending that we’re doing. So it fulfills a need,” says Bob Boucher, senior vice president and chief lending officer. “A lot of the large banks have ignored or actually pushed away the small self-employed or small corporations. They don’t want to do the business.”

Nutmeg State FCU’s niche is businesses that need credit lines between $50,000 and $100,000 for working capital to allow them to pay their bills and get ahead. The popular loans allow businesses to hire extra staff, as the restaurant owner and auto body shop owner did, or rewrite debt held at a higher interest rate at a larger bank. Focusing on smaller loan amounts — including lines of credit, term loans, and commercial real estate loans — allows Nutmeg State FCU to lend to more of its members and diversify its risk over several business types.

 

If we can do things that are going to boost sales at locations and give the economy a bit of a boost as well, we're going to look for opportunities like that. 

Nutmeg State FCU’s business lending portfolio is approximately $3 million as of June 2012, with 18 lines of credit, three term loans, and five commercial real estate loans. The credit union surpassed its goals through snowballing referrals and virtually no advertising. Next year, the credit union aims to double this year’s new loans, which should be an attainable goal given the high demand from the small businesses that Boucher describes.

“Your self-employed borrowers rarely have a credit score as high as retail borrowers,” Boucher says. “They’ve had a rough past three or four years. The average score is between 660 and 670, close to prime. We don’t make a loan if we don’t feel there’s a chance of repayment. We want to make sure the business has a positive cash flow, that the debt servicing level is good, and that we have some collateral.”

Nutmeg State FCU has positioned itself well with the new program. It is not charging rock-bottom rates — but at roughly 6.25% most of its loans are still lower than what most larger institutions offer — and it has avoided fixed rates so it will reap more return as rates rise. The credit union makes all the underwriting decisions but relies on a CUSO to prepare credit memo packages so it can make a more organized decision. It also turns to the CUSO for advice on lending dilemmas.

Business members are also privy to merchant services such as savings and checking accounts with free electronic banking, eStatements, electronic bill pay, mobile banking, a free debit card, and electronic check deposit. Other business checking features include no minimum balance fee, no monthly maintenance fee,and no deposited check item fee.

“We’re careful and cautious,” says John Holt, Nutmeg State FUC president. “We’re not overdoing it. We’re proceeding at a slow-to-moderate pace.”

Crashing A Mom-And-Pop Shop

Ohio Healthcare Federal Credit Union is constantly on the prowl for projects to support local businesses, says marketing director Jaime Crooks. So when the Central Ohio Chapter of Credit Unions developed a “cash mob” event to lure shoppers into locally owned stores, the credit union signed on to sponsor one.

“One of our goals is to improve the financial condition of our members and people in the community,” Crooks says. “If we can do things that are going to boost sales at locations and give the economy a bit of a boost as well, we’re going to look for opportunities like that.”

Cash mobs are events, usually marketed through social media channels, that direct people to visit a specific location at a specific time and spend a specific amount. In the Central Ohio Chapter’s cash mob case, consumers were asked to spend roughly $20. The targeted businesses are locally owned so participants have a direct impact on their local economies. One credit union serves as the host of the monthly event and is charged with selecting the business and getting the word out. More than a handful of credit unions have volunteered to host a cash mob in 2012.

The cash mobs, which started in May this year, are proving to have a significant impact on sales. The first event, which targeted a family-owned market that had been serving the region for more than 40 years, drew an 18% year-over-year sales increase. Another cash mob triggered three times the normal traffic at a peanut shop. Crooks, who is also on the Central Ohio Chapter’s marketing committee and helped develop the initiative, said Ohio Healthcare FCU chose Gallo’s Pit BBQ to “mob” in August because its owner is a member.

Rather than go to a fast food location that’s convenient on the way home, people are going to a location that’s directly impacting their hometown community, Crooks says. The day of its cash mob, Gallo’s Pit BBQ had a 66% increase in sales over the same day a week prior.

“As a family-owned and operated business in a challenging economy, we were thrilled with the significant sales boost we saw during the Cash Mob,” owner Nikki Gallo said in a press release.  “Plus, I believe the word is spreading as we have had a steady stream of business coming in since.”

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