A Clear and Present Opportunity for More Credit Unions to Serve Small Business
A Credit Union Industry White Paper from
CUinfluentialsm
WHAT YOU NEED TO KNOW:
· There are 33.3 million small businesses in the United States.
· Small businesses employ 61.6 million people, or 45.9% of the entire U.S. workforce.
· 3/4 of small business owners are concerned about access to credit and there is a strong credit demand.
· Most (72%) of small businesses applied to large or small banks for credit in 2023 while only 7% applied to credit unions.
· Online lenders are gaining in popularity, but many charge predatory rates.
· Historically, in order to offer member business loans and lines of credit, SBA 7a and 504 loans, USDA loans, construction lending and commercial real estate investments, credit unions have either hired former bankers or joined member business lending CUSOs.
· Now a secure, “prospect to payoff” end-to-end cloud-based commercial/member business lending and SBA loan origination and hosted servicing platform is available to all credit unions, opening the doors to membership, asset and revenue growth.
Introduction and Background.
In the early days of credit union Member Business Lending, large credit unions hired former bankers, small and mid-size credit unions joined a member business lending CUSO (usually run by a former banker) and everyone else that wanted to put member business loans on the books without hiring a former banker or joining a CUSO, purchased participation interests in commercial loans and treated them as investments.
Some outstanding member business lending CUSOs such as Oregon’s CU Business Group, the Michigan Business Connection, Cooperative Business Services in Cincinnati, and Member Business Financial Services in Philadelphia - to name a few - have expanded their original credit union client base by providing underwriting and servicing for individual credit unions in other states so more credit unions could offer conventional commercial loans and SBA loans. For example, Member Business Financial Services, a CUSO originally created in 2008 by American Heritage Federal Credit Union and 5 partner credit unions in Pennsylvania, has grown to serve the underwriting, servicing and portfolio management needs of nearly 100 credit unions in the Mid-Atlantic and northeast United States who can now offer business lines of credit, commercial real estate loans, term business loans, SBA 7a and 504 loans and residential investment property loans. Cooperative Business Services, a CUSO originally chartered in 2003 to serve the business lending needs of credit unions in Ohio, now provides commercial real estate loans (purchase or refinance; retail, office, industrial, multi-family, medical/dental & more), construction financing, term loans, and SBA loans, up to $30,000,000 for member credit unions in 16 states.
Yet, in 2023 less than 10 percent of business loan applicants turned to credit unions for their financing needs. Thousands of credit unions are not members of a business lending CUSO, nor do they have the tools necessary to independently offer conventional commercial and SBA loans to their small business members and potential members.
Why? Primarily because business lending has historically required more expertise and ongoing analysis than consumer lending and the paperwork is different. Small business entities don’t have paychecks or W-2s. That means that credit unions need to be able to interpret P&L statements and perform multiple key ratio analyses to determine liquid capital, accounts receivable turnover, inventory turnover, debt to assets, debt to equity, interest coverage, return on equity and on ad nauseum. Also, commercial and SBA loan documentation is much more complicated than consumer loans. So, it is the complexity of business lending that has kept most credit unions out of the game. Until now.
A Look at The Rapidly Changing Lending Market
Before we arrive at the solution, let’s take a deeper dive into the current small business lending environment and the opportunity it presents for credit unions.
How large is the small business lending market? Small Businesses drive the American economy. Consider the following excerpts from “Small Business Statistics of 2024”, published by Forbes Advisor[1]:
Almost all businesses across the U.S. are small businesses. While large corporations often grab headlines, it’s small businesses that form the bedrock of the American economy. Recent data from the U.S. Small Business Administration reveals a remarkable figure: 33.3 million businesses in the United States qualify as small businesses, making up 99.9% of all U.S. businesses. This number not only reflects the dominance of small enterprises in the business sector but also shows their significant role in generating
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