You Can Do It, They Can Help

Incubators and other like-minded organizations help credit unions connect with entrepreneurs and new business.

 
 

In 1980, only 12 business incubators were operating in the United States, according to the National Business Incubation Association (NBIA), an organization representing small business cultivation services worldwide. By 2012, that number had jumped to more than 1,250.

Incubators continue to grow in prevalence today, thanks in part to their ability to leverage community-oriented partners like credit unions to expand their reach. But the benefits of those alliances go both ways.

Organizations like incubators offer credit unions access to new MBL opportunities, markets, and technologies. They also allow credit unions to assume a consultative role in the functioning of their local economies.

Did We Just Become Best Friends?

According to the National Business Incubation Association, factors like the four listed below make incubator-credit union partnerships a natural fit.

  1. A Presence In Diverse Markets
    Roughly 47% of incubators operate in urban areas; 28% and 25% operate in rural areas and suburban areas respectively. Whatever your footprint, there’s likely a potential partner nearby.
  2. A Shared Local Focus
    Businesses who participate in incubators tend to think and invest locally once they hit their stride. Roughly 84% stay in their local communities long term. This is in line with the goals of credit unions that strive to better their communities.
  3. A Younger Membership
    Academic institutions sponsor nearly one-third of North American business incubators, which means there’s a strong Gen Y and Z presence among their rosters. Help out a young business owner now, gain a member for life.
  4. A Future Vendor Partner In The Making
    A full 37% of incubator-spawned startups focus on technology, meaning today’s star pupil might be tomorrow’s vendor partner.

 

The three partnerships outlined below were created with varying degrees of investment and pursuant to different organizational goals but all underscore the opportunity in working with third parties in the small business market.

It's All About Who You Know

Digital Federal Credit Union ($5.7B, Marlborough, MA) has long embraced the fact that innovation sometimes requires calculated risks.

CU QUICK FACTS

Digital Federal Credit Union
 
  • HQ: Marlborough, MA
  • ASSETS: $5.7B
  • MEMBERS: 446,822
  • 12-MO SHARE GROWTH: 10.00%
  • 12-MO LOAN GROWTH: 11.16%
  • ROA: 1.33%

For the past five years, DCU has held an employee innovation contest that offers cash rewards and a healthy dose of recognition for ideas on how to improve the credit union.

"We wanted to take some of the great employee ideas that have not bubbled their way up through traditional means and put a contest around them so people were vying to present their ideas to the organization," says David Araujo, DCU's vice president of information systems.

These contests have driven significant improvements, such as a centralized CRM system that allows employees to see all the offers members have received. But the contests also have a significant limitation.

"Most of our employee-driven innovations were operationally focused more so than member-focused," Araujo says. "As a result, we decided to complement their efforts by seeking input from outside the organization."

To start with, DCU began sponsoring two external innovation contests at local universities. It then partnered with a New England-based shared workspace company called Workbar. This summer, Workbar and the credit union opened a facility in downtown Boston called the DCU Center of Excellence in Financial Services.

The center offers plenty of desk workspace as well as open collaboration areas and conference spaces.

However, participating companies — of which there are currently four — must focus on the financial technology space. Ideally this includes startups with just a handful of employees.

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Representatives from DCU, Workbar, and participating companies gather to celebrate the opening of the DCU Center of Excellence in Financial Services and share ideas for its future.

Araujo oversaw the 12-month development of the center as a side project. Now, DCU executives have committed to monthly counseling sessions with the young companies and are also helping them connect with key business development resources.

This kind of assistance is essential for fledgling firms. According to the Small Business Administration, one in three new businesses do not survive more than two years. By comparison, nearly 90% of the graduates from NBIA-tracked programs are still in business today.


DCU has no equity stake in these nascent companies and is viewing the incubator primarily as a research opportunity and a chance to give back to the community rather than a driver of loans or income.

"We hope to be an advocate and a resource for these companies as well as a potential customer down the line," Araujo says. "If we can connect with them in their early phases of development, we can allow them to leverage our expertise and give them the ability to make a better product or service."

A Stepping Stone To New Branches And New Business

According to NBIA, 32% of business incubators have ties to educational institutions, making them a valuable entry point for cooperatives that have not historically been involved with an academic field of membership.

For example, Hope Credit Union ($182M, Jackson, MS) partnered with the University of Arkansas at Pine Bluff (UAPB) in 2013 to open a branch at the university's off-site incubator.

CU QUICK FACTS

Hope Credit Union
 
  • HQ: Jackson, MS
  • ASSETS: $182M
  • MEMBERS: 29,515
  • 12-MO SHARE GROWTH: 12.06%
  • 12-MO LOAN GROWTH: 5.26%
  • ROA: 0.13%

"We did some renovations to the location, but relative to starting a traditional branch, the cost was very low," says Bill Bynum, Hope's CEO.

Because UAPB has a small on-site credit union, Hope historically had no point of contact with the university's students. Additionally, its lending opportunities at the university were limited primarily to commercial projects involving campus housing or facilities development.

That has changed since Hope opened its permanent branch at the incubator.

"There are many historically black schools, community colleges, and universities in our region where the alumni, students, and faculty are more likely than the general population to be underserved," Bynum says. "We're taking the traditional SEG approach and applying it to these institutions."

In addition to creating a contact point with students, the new location has also given Hope the chance to participate in the creation of Fast Track, a credit union-backed curriculum for the incubator.

"The idea with Fast Track is that we can teach entrepreneurs how to better develop their business plans, which will allow us to make better lending decisions and help more of them get a loan when the time comes," Bynum says.

Hope's work with the incubator's entrepreneurs ties in nicely with its efforts to support local economic growth. According to the Small Business Administration, entrepreneurial small firms generate more than 60% of net new private-sector jobs, which goes to show investments here do impact the broader economy.

Of course, Hope's work with the incubator and similar programs also has perks for its own bottom line. As of June 2014, Hope's 12-month member growth, loan growth, and MBL growth was up 5.6%, 5.3%, and 14.6%, respectively, according to Peer-to-Peer Analytics by Callahan & Associates.

An Opportunity In The Micro Segment

Both philanthropic reasons and financial ones lie behind the decision of Redwood Credit Union ($2.4B, Santa Rosa, CA) to join forces with the Community Action Partnership of Sonoma County (CAP Sonoma).

CU QUICK FACTS

Redwood Credit Union
 
  • Santa Rosa, CA
  • ASSETS: $2.4B
  • MEMBERS: 237,000
  • 12-MO SHARE GROWTH: 6.37%
  • 12-MO LOAN GROWTH: 14.46%
  • ROA: 1.95%

This non-profit organization is one of 1,000 Community Action Agencies operating nationwide that facilitate equality and greater opportunities for low-income Americans.

Although it is not officially a business incubator, CAP Sonoma does provide support and education to local small businesses, says Michael Downey, Redwood's senior vice president of business services.

Redwood has been an active member business lender since the mid-2000s and holds approximately $20 million of its $245 million MBL portfolio in microbusiness loans of $50,000 or less. This is a ratio the credit union would like to increase moving forward.

To facilitate that goal, in 2013, Redwood committed to lending up to $1 million to qualified graduates of CAP Sonoma's 18-week financial education program.

Unfortunately, smaller loans don't necessarily mean smaller risks. Many microbusiness owners struggle with running the daily operation of their business and acquiring the capital they need to grow.

"Most people start a business because they're good at something, but that might not always be finance," Downey explains. "As a result, many of these borrowers need educational resources to better understand things like their business plan, income statement, and cash flow."

Early forays into microlending highlighted the gaps in Redwood's lending resources. That's when a board member with ties to CAP Sonoma suggested the organization might be able to help head off roadblocks and give borrowers access to extra resources before they sought financing.

CAP Sonoma's small business curriculum currently includes five multilingual classes that combine resources from the entrepreneur training group NxLevel with personal financial literacy and business financing coursework.

Four classes have graduated from the program so far in 2014, and Redwood is considering two loan requests from graduate business owners.

"Most of the loans made through this relationship will be operating lines of credit, equipment financing, or a small amount of working capital," Downey says. "But we hope they'll be a launchpad for additional relationships, particularly as these grow from sole proprietorships to employer businesses with payroll servicing needs or a desire for merchant services."

Delinquency on total business loans at Redwood is approximately 1.4%, and the oversight and support provided by CAP Sonoma will help mitigate the additional risks that come with financing entrepreneurial endeavors.

"Without that educational component as a risk mitigant, we might not be able to do these loans," Downey says. "However, once they exit the 18-week program, we're dealing with a more qualified borrower who understands what they want to do as a business."