Why are credit unions becoming more business-friendly?
A recent Entrepreneur article focused on credit unions and how they can be an ally when startups or small businesses seek financing. Since the Great Recession in December 2007, partnerships between credit unions and small businesses have become increasingly commonplace, and Entrepreneur relayed some interesting statistics that support the reality of this emerging trend.
Take for instance Wisconsin, where the 2013-14 scorecard reported credit unions in the state have over $2.7 billion of business loans on the books, up from $1.5 billion in December 2007. This represents a 73% increase in business lending. When we examine the same timeframe for banks in Wisconsin, however, we only see a 1.5% increase in business loans. Similar trends emerged outside of the “Wisconsin vacuum.” Nationwide, the first three quarters of 2013 saw a 9.2% increase in credit union lending to members for business purposes.
The underlying cause for this trend could be any number of items, and in listing a few, the aim is not to proclaim an irrefutable causal relationship. Nor is it to compare the lending aptitude of banks and credit unions; rather, it is to examine the macroeconomic environment and determine which, if any, contributing factors could be playing a role in this trend.
The first ‘honorable mention’ is the financial crisis of 2007-2008. During this time and in years following, a credit freeze swept the banking system. Businesses seeking credit found it difficult to obtain in the same venues that were previously plentiful. One outlet that was likely always accessible but often overlooked was credit unions. These institutions did not get out of the crisis unscathed, but the extent to which they were impacted was far less than that of banks, and their ability to lend to credit-worthy businesses remained relatively intact throughout the downturn. As such, businesses which needed funding but could not get it through banks turned to credit unions. As the old adage goes, “it’s easier to keep a customer than to get a new one,” so those that may have wandered into a credit union loan by happenstance before may now look to credit unions in the future for their business lending needs.
Another contributing factor to credit unions’ newfound business-friendly outlook could be a proactive push from management. Because they obtained new business after the crisis, credit unions gained some experience in member business lending and found it to be a profitable revenue stream. Credit unions which historically shied away from business lending saw their peers profiting from it, so the sentiment shifted somewhat. They know it can make money, they know there is increased opportunity with improving credit quality, so it may be that the increased prevalence of business lending by credit unions is a result of management spinning the wheels to make it happen.
Some bankers that exit the industry have moved to credit unions, and brought with them their lending experience. Boards of credit unions have known that commercial lending is profitable, but lacked the personnel to effectively execute. Though this is only pertinent in a select circumstances, certain industry professionals like Mike Ford, director of financial markets at Sageworks, have noted an increased prevalence of former bankers in credit unions. “It’s certainly been a trend I’ve seen while working with regional credit unions. They understand in order to safely and effectively grow their MBL, they need systems and experience. That experience, in many cases, comes from former bankers,” states Ford. This could also contribute to the heavier involvement in business lending in recent years.
In summary, credit unions will by no means replace banks in lending to businesses. It is written in their charter that they are only permitted to participate in business lending up to a certain percentage of their asset size. Historically, credit unions have not fully utilized this quota of business lending; however, recent periods have shown that they are increasing their participation in member business lending, and we may see that trend continue for the aforementioned reasons, among others.
For more information on how the MBL landscape has changed, download our whitepaper, Member Business Lending Landscape: Managing Risk & Opportunity.