Partnerships Power Business Lending

Jim Jerving
June 25, 2007

Credit unions have been making business loans since their early beginnings in Levis, Quebec in 1901. Members reasoned that if credit unions did a good job with their personal loans and savings, it made sense to finance an office, truck, or warehouse. While growth is slowing in many areas, business lending is the fastest-growing segment of the loan portfolio.

Experienced business lenders are a scarce commodity in most markets. Even though banks face this challenge, a talent shortage is especially acute among credit unions. For the most part, credit unions are new to business lending, so they need to look elsewhere—banks primarily—for talent. Understanding the culture and the ability to change one’s focus from profitability to serving the member are the key elements of a successful transition from bank to credit union business lending.

Small business owners are a market niche that is increasingly attractive to all financial institutions. Larger banks traditionally passed on small businesses for the same reasons they overlooked low- to middle-income customers—a perception that they were unprofitable. As the lending market becomes overcrowded with new entrants, that perception is fading and banks are taking a closer look at small businesses.

The experience of participation loans and CUSOs indicates that a business loan secondary market has been operating for a period of time, although it lacks structure and standards. Business loans have more moving parts than mortgages or car loans and tend to be customized, so they are more difficult to fit into a tidy commodity package. As liquidity is starting to dry up, there is a need for a more structured secondary market for business loans that exists outside of the credit union system.

A formal secondary market would increase loan participation efficiency and reduce expenses. And it could provide some relief from the member business loan cap. It would serve to lessen the credit union risk exposure when making a large loan amount. Liquidity needs could be better served as well.

This is the executive summary to a CUNA Lending Council white paper by Jim Jerving entitled “Partnerships Power Business Lending.” Read the complete paper at http://www.cunaopsscouncil.org/tools/research.html (Click the Lending Tab).