More credit unions offer business loans
By Jay MacDonald • Bankrate.com

Before you slip on your kneepads and prepare to grovel for a business loan from your local megabank, first give a call to your friendly neighborhood credit union.

More credit unions are offering business loans these days, yet another sign of the sweeping changes being wrought on the financial landscape by the consolidation of big banking.

Ironically, credit unions were originally formed in Europe during the 1800s specifically to provide business loans. In America, however, commercial banks have traditionally served that function while credit unions concentrated on the personal banking needs of their members.

"Legally, there was never any reason credit unions could not do business loans; they just simply chose a different direction," says Russ Van Zeeland, vice president of Business Lending Group Inc., a credit union service organization in Neenah, Wis. "It was the choice of which market they wanted to serve."

That began to change in recent years as big banking took on the credit unions, claiming their nonprofit status gave them an unfair advantage in the marketplace. Last year's passage of the Credit Union Membership Access Act placed a 12.25 percent lending limit on credit unions but broadened their reach into the communities they serve.

War of the wingtips
All the hoopla over HR 1151 may have backfired on the banks, at least where business loans are concerned, according to Mike Schenk, vice president of economics and statistics for the Credit Union National Association.

"There were several unintended consequences from the banker's point of view from our battle with the banks," he says. "No. 1, a lot of consumers that didn't know about credit unions found out about them. We had a lot of press and brought a lot of members into the fold because of that. No. 2, credit union managers got hooked into this whole debate about business lending and realized it was something they should be taking a closer look at."

That's not likely to make big banking quake in its wingtips just yet, however.

According to Federal Deposit Insurance Corporation and CUNA statistics, at year-end 1999, banks held a 99.6 percent share of the business loan market.

Today, roughly 15 percent of America's 11,300 credit unions offer business loans amounting to just 1.5 percent of total credit union loans. The average size of a member business loan for agriculture is $35,000; average for all other member business loans is $82,000, although Schenk suspects that as many as 70 percent to 80 percent would be for much smaller amounts; say, the cost of a new computer.

New hope for small biz
What may be more significant for small business is that business lending is catching on with credit unions. Last year, it grew by 19 percent verses 8 percent at banks. For the past four years, business lending has grown 13 percent at credit unions verses 10 percent at banks.

Some CUs, such as Visions Federal Credit Union of Endicott, N.Y., are offering secured loans of up to $1 million on their own. Others, such as CitizensFirst, Banta Community and Fox Communities credit unions of Wisconsin, have thrown in together to form a for-profit credit union service organization, like Business Lending Group, to handle all underwriting and servicing for the lenders.

"A CUSO allows them to share in the risk of the loans just as they were able to share in the development costs," explains Van Zeeland. (What's a CUSO? See our earlier story.)

Schenk says big banking is actually creating the market for credit union business loans, albeit unintentionally.

"With all the mergers, the service that businesses used to get from their banks is changing," says Schenk. "The decisions aren't being made in town anymore, they're being made out of state. At the same time, we've seen a fairly large increase in home-based businesses and people starting businesses of their own who wouldn't be given the time of day by their local bank. Those things have contributed to the increase."

An inroad to new markets
The Small Business Administration, for one, has taken notice of the trend. On June 6, it began offering its 7(a) loans through credit unions, in part to get the financing to those who need it.

"We did this to gain access to communities that we are trying extra hard to reach with SBA guaranty loans," says SBA spokesman Mike Stamler. "These are primarily new market communities with women, minorities, economically distressed urban areas and isolated rural areas, as well."

The 7(a) program provides loans to small businesses that are unable to get reasonable terms from other lenders. Instead of paying the loan back in three years, typical of most credit union loans, business owners can take seven to 10 years to pay their loans off.

It's a market the new merged banks tend to overlook.

"These loans are too small for a lot of banks," Stamler says. "They are too costly per dollar lent. They take just as much work as the larger loans."

Those sweet CU terms
Traditionally, credit unions have been cherished by the working person -- and loathed by big banking -- because, as nonprofit organizations that do not pay dividends to shareholders, they can pass on savings to their members in the form of lower interest rates, lower fees and higher yields on deposits.

Does the same hold true for member business loans?

Not necessarily. At least not at the Fox Valley credit unions.

"No, we need to pay the same CD rates as anybody else to get money in the credit union to lend the money out," says Van Zeeland. "We're all vying for the same funds, all costs of funds are the same, so our business loan rates are going to be competitive with commercial banks."

Then again, some credit unions may continue the tradition of offering ready cash for less, according to Schenk.

"I don't have comparative numbers because business loans are not standardized like a four-year car loan, but I would be really surprised if there wasn't a rate advantage in the business loan arena," he says.

Bottom line: Credit unions and small businesses may make beautiful loans together.

Jay MacDonald is a freelance writer based in Florida
If you'd like to make a comment on this story,
e-mail bankrate editors.

-- Posted: Aug. 28, 2000