Relative newcomers to the field of making business loans, credit unions nonetheless have become key players in today’s tight-money economy. Barely 10 years ago, credit unions concentrated mainly on savings and checking accounts, and made personal, auto and home loans. But the Credit Union National Association says credit unions nationally originated $6.5 billion in business loans in the first six months of 2008, up 36 percent from the $4.8 billion in the corresponding period of 2007.
Credit union business loans in Arizona average about $240,000. Because the loans are relatively small, credit unions focus on small businesses.
For the past six years, Arizona credit unions have been working closely with the Small Business Administration and have emerged as strong SBA lenders. But because of the expertise involved in making such loans, only the larger credit unions are active in that segment of lending.
Steve Dunham, president and CEO of Canyon State Credit Union and board chairman of the Arizona Credit Union League & Affiliates, suggests that credit unions with assets of at least $400 million generally have the ability and staff support, so they are most likely to make business loans.
Then there is the issue of the federal cap, which the credit union industry has been trying to get Congress to increase or eliminate. Under the cap, credit unions may make business loans totaling no more than 12.25 percent of their assets.
The business lending cap comes into play at Arizona State Credit Union, one of the state’s largest.
“We’re getting very close to the cap, so we are being selective about what we do,” says Paul Stull, senior vice president of marketing at Arizona State Credit Union. “We keep bumping into it, and we have to find a way to make room. It’s quite a challenge to manage that.”
Despite the regulatory limits placed on credit unions, opportunities for businesses to borrow are available. Businesses face a combination of challenges, such as finding a money source and finding the right rate, Stull says.
“For many of the people we deal with, the rate is important, but many times they don’t have too many alternatives to look at for financing,” Stull says. “That usually means their needs are somewhat smaller than the targeted range of other providers. It takes just as much work to originate a small loan as it does a large one. Some would prefer to do only larger loans. A small business person might fall outside of that window. When they do, it’s tough for them to get the attention they want and deserve. Certainly small enterprises are not coming up on the radar of some of the larger lenders. That doesn’t mean rate isn’t important. It still is. But clearly you need to talk to somebody before you can get a rate.”
In all phases of lending, credit unions traditionally follow very conservative underwriting principles and only make loans to members. It’s not uncommon for an individual member to approach a credit union with a business loan request.
“The strong suit for credit unions is what it has always been — credit unions take the time to know their members,” Stull says. “That certainly puts us in a better position to meet the needs of a business. Many of our business customers have a personal relationship with us. They like the way we treat them personally, and they realize they can do their business banking with us as well. And that leads to a deeper relationship. The wider use of our business services is a more recent phenomenon. It’s a natural progression, and is indicative of the way we like to know our customers.”
Most experts see the economy beginning a slow turnaround toward the end of this year or early 2010. Consumers for the most part are still on the sidelines. Credit unions and the business community are keeping an eye on the nation’s savings rate.
For the past 20 to 30 years, Americans saved 7 percent of the income. But in recent years, before the recession hit, people were spending and borrowing more and saving considerably less. The U.S. Department of Commerce notes that the U.S. savings rate has been on the rise after almost five years in which consumers barely saved a penny.
Stull calls the rise in savings a good sign-bad sign situation.
“It’s good because people are being more cautious, developing more security,” he says. “The money they save goes to financial institutions and becomes available for lending. But, it’s a bad sign because people are not buying cars, motor homes, washers and dryers, and they’re not dining out as much as they used to. So it’s really kind of a double-edged sword.”