When talking about credit unions and business loans, the key word is small. The percentage of business loans to credit union assets nationally is about 2 percent; business loans in Arizona average about $240,000, compared to $180,000 nationally. And because the loans are relatively small, the focus is on small businesses. Federal law caps credit union business loans at 12.25 percent of total assets.
“With business loans hovering at around 2 percent, it tells you that a lot of credit unions are not doing business loans. But they have plenty of room to assist businesses,” says Scott Earl, CEO of the Arizona Credit Union League and Affiliates.
One of the reasons that a majority of credit unions, especially smaller ones, don’t dabble in business lending is because of the level of expertise required.
“You need to be fairly sophisticated,” Earl says. “Traditionally, larger credit unions have the ability and staff support to make business loans.”
Of course, not all business loans require a lot of sophistication. Perhaps a teacher has a summer job doing yard work and needs a trailer to haul things around. In fact, many of the loans go to sole proprietors, and some involve small-business owners who were turned down by a bank.
“We hear stories like that all the time,” Earl says, “and not because of economic conditions.”
Traditionally, a credit union gets involved in business loans because some loans are too small for the average bank — not worthy of their time and effort. That’s probably a bigger issue during an economic boom, Earl says.
“We’re making business loans. You hear about banks pulling out of business lending. But we have not done that,” says Mark Olague, assistant vice president of business lending for Desert Schools Credit Union.
He tells of a business prospect who had a construction loan with a bank and was having difficulty getting timely advances. Not only did the credit union make the construction loan, refinancing was approved for commercial loans on several of the client’s other Phoenix area properties, as well.
“We were able to step up and do the construction loan for that small business, making our member happy,” Olague says. “The key regarding the credit union world is that not only are we here to service business loans, we’re looking for relationships. We are relationship-oriented.”
In addition to providing an attractive interest rate on a business loan, credit unions offer such services as a checking account, credit card options for sales and purchases, and a 401(k).
“We’re like a one-stop shop,”
Olague says. “We can make loans for an overdraft line of credit for as small as $2,000 or for the purchase of a business vehicle for $30,000 to $40,000. Generally our footprint is from $25,000 to $2 million.”
Desert Schools’ business members generally seek loans for purchasing a fixed asset to start a new business.
“We’re not entertaining startups,” Olague says. “Normally, we’re looking at businesses that have been in existence for at least two years.”
All, however, is not rosy among credit union business members. A few have had bankruptcy issues and cash flow difficulties.
“We’re here for them in good times and bad times,” Olague says. “We may modify their loan to make payments easier for the interim.”
At First Credit Union, which has been making business loans for four years, Joe Guyton, senior vice president of credit, says he’s not seeing startups like he did a year earlier.
“The economy is clearly having a big impact on the capital needs of beginning a business,” Guyton says.
“There are not many people out there with the confidence to start a business. Our business members are coming in to maintain their borrowing relationship. They are concerned about losing that relationship. The amount of inquiries regarding new projects has almost dried up — anything with construction dollars on it.”
Although some business members have filed for bankruptcy, because First Credit Union is relatively new to business lending, the impact on it is considerably less than it would be on a major bank, Guyton says. Fewer than 1 percent of the credit union’s 60,000 members are businesses.
“We’re in a good position to continue to help them,” he says.
Michael Hollar, vice president of business financial services for Arizona Central Credit Union, says most of his business members are struggling. Last year, when gas prices skyrocketed, business members making deliveries took a huge hit. They were looking for alternate sources of fuel and were not seeking loans to buy new vehicles. They repaired what they had.
“A few of the savvy ones, when interest rates started dropping on the real estate side, came in to refi a loan with lower rates,” Hollar says. “We accommodated most of them. We charged a fee, but they were OK with that, rather than staying with the same payments.”
The volume of loan requests dropped considerably during the last three-to-four months of 2008. There were a few startups, mainly from people who had been laid off and were trying to go into business for themselves.
“In this environment, there is very little interest in businesses buying a new piece of equipment or looking for a building,” Hollar says. “They’re hunkering down to ride out the storm, hoping that 2009 brings a brighter day.”