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Cascade: No. 71, Spring/Summer 2009

Credit Unions Pursue Small Business Loans

During the current recession, credit unions are making inroads in small business lending, while banks are tightening underwriting criteria for such loans.

Molly Snody, director of business advisory services for the Pennsylvania Credit Union Association (PCUA), said the small business market “has been largely underserved” during bank consolidation in recent years. This year, business owners who are credit union members have increasingly been seeking financing from these institutions, she said.

Snody provides training to credit unions that want to enter business lending and is developing working relationships with the U.S. Small Business Administration, small business development centers, and Commonwealth of Pennsylvania officials. Prior to joining PCUA in 2002, she worked in commercial lending for 11 years as a credit and loan review officer and as a loan operations manager for Community Banks, N.A. (now part of Susquehanna Bank).

The owners of this restaurant in Ewing, N.J., received an equipment loan from the Credit Union of New Jersey, which is one of four member-investors in East Coast Business Lenders.The owners of this restaurant in Ewing, N.J., received an equipment loan from the Credit Union of New Jersey, which is one of four member-investors in East Coast Business Lenders.

Credit unions that want to begin lending to businesses may either develop specialized staff or outsource underwriting, servicing, and other functions. “We tell credit unions that it’s in their best interest to train their staffs or hire experienced personnel,” Snody said, “since the credit unions are responsible for the lending decisions.”

In another model, credit unions may develop expertise in business lending from a credit union service organization such as East Coast Business Lenders (ECBL), which provides financial analysis and underwriting, loan documentation, servicing and monitoring, and education and training. ECBL was capitalized in 2006 by the Philadelphia Federal Credit Union (FCU), the Credit Union of New Jersey in Ewing, N.J., First Financial FCU in Wall, N.J., and the New Jersey Credit Union League. It works with other credit unions on a fee-forservice basis.

Kathie A. Stone, ECBL’s CEO and a 25-year veteran of small business and community lending at financial institutions in the Delaware Valley, said extensive time and counseling are often required to meet the financial needs of small business owners, and that spending the extra time is consistent with the credit unions’ mission as not-for-profit cooperatives.

Credit unions can only lend to their members, who are defined in their charters.1 Credit unions have traditionally had products targeted to consumers. So business lending is a new growth area, although some credit unions have been making business loans since their inception.

The Credit Union National Association (CUNA), a trade association, said that nearly 2,200 credit unions (27 percent of the nation’s 8,000 credit unions) reported outstanding business loans at the end of 2008. Outstanding balances in business loans from credit unions totaled $33 billion at the end of 2008.2

CUNA economist Michael Schenk said that larger credit unions are more likely to make business loans; over half (53 percent) of the 3,500 credit unions with more than $20 million in assets reported outstanding business loans at the end of 2008. Only 7 percent of the nation’s 4,500 smaller credit unions reported outstanding business loans at year-end.

The dollar amount of business loans as a percentage of total credit union loan dollars rose from 4.7 percent in 2006 to 5.2 percent in 2007 and climbed to 5.7 percent in 2008, Schenk explained. He said CUNA hears anecdotally that many new borrowers are coming into credit unions because they’ve been turned down by banks. But he noted that banking institutions held 98.94 percent of outstanding business loan dollars at the end of 2008.

Credit unions in Pennsylvania and New Jersey tend to make small business loans of $1 million or less and loans to businesses that have gross annual revenues of $1 million or less, according to Snody, Stone, and Paul Gentile, president and CEO of the New Jersey Credit Union League.3

Stone said that credit unions occasionally receive applications for larger business loans due to a curtailment of loans by commercial banks, and that those opportunities provide credit unions with increased membership, business loans, and prospects for other business and consumer services. She noted that a barrier to expansion of credit union business lending is the business community’s limited awareness of the availability of business loans and services from credit unions.

For information, contact Molly Snody at (717) 234-3156, ext. 5209, or molly.snody@pcua.coop E-Mail; www.pcua.coop External Link; Kathie A. Stone at (609) 538-4061, ext. 2055 or kstone@cunj.org E-Mail; www.eccuso.com External Link; and Michael Schenk at mschenk@cuna.coop E-Mail; www.cuna.org External Link.

  • 1 An exception is loan syndication.
  • 2 At the end of 2008, 85 Pennsylvania credit unions had $438 million in outstanding business loans, 29 New Jersey credit unions had $212 million in business loans, and three Delaware credit unions had $1.8 million in outstanding business loans. The average size of business loans in 2008 was $212,752 nationally, $212,068 in New Jersey, $151,508 in Delaware, and $146,761 in Pennsylvania. These data are from CUNA.
  • 3 According to the PCUA, the Pennsylvania credit unions with the largest business loan portfolios at the end of 2008 were Members 1st FCU, Mechanicsburg ($172.9 million); Citadel FCU, Thorndale ($45.2 million); and Philadelphia FCU ($32.9 million).