Why SBA Lending May Offer Growth Prospects for Credit Unions
Business borrowers really like credit unions – when they use them.
In fact, credit unions have some of the highest business-borrower satisfaction rates among all types of lenders, according to the Federal Reserve’s latest Small Business Credit Survey. Satisfaction with credit unions was 76% among applicants for new credit — higher only for businesses that had applied at small banks (at 79%). Among small businesses with existing loans, lines of credit, and cash advances, credit unions garnered a “satisfied” rating from 85% of them. That topped satisfaction rates for small banks, large banks, and online lenders.
Despite these figures, only 9% of small businesses sought credit from credit unions, according to the survey. And few credit unions are involved in lending programs backed by the U.S. Small Business Administration that cater to small businesses.
Only 178 credit unions, or 3%, were active lenders in the most popular SBA program, the 7(a) loan program, in federal fiscal 2018. This is the case, despite the fact that SBA lending has gained momentum among small businesses in the past five years. The number of SBA loans by all financial institutions increased 30%, and the approved dollar amount of SBA 7(a) loans jumped 42% (to $25.3 billion from $27.8 billion) during that time period, based on SBA statistics.
Credit unions in fiscal 2018 originated just 1.2% of all approved SBA loans, and overall 7(a) volume from them declined nearly 10% from the previous year, according to statistics cited by American Banker.
“Why aren’t credit unions offering SBA loans? They just don’t,” says Rob Ashbaugh, Abrigo Executive Risk Management Consultant. “They can do it, but some just don’t see the benefit, or the need for it.”
Many credit unions focus on consumer credit and, therefore, have less interest in business lending, Ashbaugh noted. Others that do offer member business loans have simply never offered SBA loans, so they lack experienced SBA lenders on staff, he said. Of course, federally insured credit unions also have a cap on aggregate member business loans of 12.25% of assets, so even those that are growing member business lending will be limited in some ways.
More room for business lending
However, a rule change by the NCUA last year said member business loans made on 1-to-4-unit family dwellings would no longer count against that cap, giving credit unions more room for business lending. For credit unions that offer member business loans and want to grow, it might be a good time to look into SBA programs. SBA programs have guaranteed loans that financial institutions can offer to small businesses at low borrowing costs.
“If you think about it, if you’re a credit union that wants to do business lending, most of your business is going to be to members that own small businesses,” Ashbaugh said. “If credit unions are already doing small business loans, it would make sense to have an SBA option to give their members as many options as they can.”
SBA, NCUA promote lending
The SBA and the National Credit Union Administration (NCUA) recently unveiled a new effort aimed at boosting participation by credit unions. They announced a three-year agreement to promote SBA programs to credit unions through webinars and training events.
The agencies are looking for ways to help credit unions better understand and make use of the SBA-backed loans and resources. Neither agency provided specifics on their plans.
“Everybody gets the benefits of SBA lending, it’s just getting organizations to commit and getting moving on it,” Ashbaugh said. “Often, they think the barriers to entry are too high, but the SBA is bending over backward to get as many financial institutions involved as possible.”
One way credit unions and other financial institutions can begin SBA lending programs or accelerate growth in existing SBA lending programs is to incorporate technology that streamlines the underwriting process. An SBA-tailored lending solution can eliminate duplicative data entry, generate required SBA forms, and decision SBA loans in the same platform as other personal loans or member business loans. It can provide management with greater visibility across the SBA portfolio, reducing bottlenecks and providing faster decisions to members.
“Technology can really help you originate your loans faster, and the underwriting and approval process will be faster,” Ashbaugh said. “That way, you can respond to your customer faster and keep the costs down.”
To learn more about opportunities in SBA lending, join Abrigo’s webinar, “What SBA Lenders Need to Know in 2019,” on June 18 with Bob Coleman, editor of the Coleman Report, as he leads a panel of experts on an overview of SBA lending.