Competition in small business lending marketplace could be heating up.
While credit unions have remained a strong player in this arena, bank lending to small businesses, moribund since the financial crisis, is finally starting to gather steam.
Demand for loans, which bankers say remained weak well after the recession ended in 2009, is now picking up, and some banks are adjusting their business models to meet it. That could mean that much-vaunted "window of opportunity" created when banks stepped away from small business loans, could be closing.
Still, small business lending is already growing at a steady clip at credit unions. The net member business loan balance at federally insured CUs increased 13% to $50.4 billion at the end of the third quarter of 2014 compared to the same time period the previous year, according to data compiled by NCUA.
And that loan balance figure stood at $41.7 billion at the end of 2012.
The average business loan size amounted to about $232,000 last year, according to Mike Schenk, vice president of economics and statistics at CUNA. "Credit union member business loan portfolios have posted double-digit growth for four consecutive years," Schenk said.
Meanwhile, data from Rebel Cole, professor of finance at DePaul University, found that the nation's top four banks, Citibank, JPMorgan Chase, Wells Fargo and Bank of America, cut their small business lending by more than 50% in the wake of the financial crisis.
In addition, figures from the Federal Deposit Insurance Corp. (FDIC) indicate that the aggregate dollar volume of banks' commercial and industrial loans of $250,000 or less — $177.4-billion — remains 11% below its pre-crisis peak of $198.9 billion.
The volume of small business loans outstanding — which is defined as loans below $1 million — has been increasing by an average annualized rate of 2% since the fourth quarter of 2012, according to the American Bankers Association.
Dennis Dollar, an Alabama-based credit union consultant, noted that while commercial banks have long focused on business lending, many have shied away from true small business lending.
"Almost all large banks want to finance the $30 million shopping center project, but very few banks are really that fired up to help the guy who needed $100,000 to buy a van and some carpet-cleaning equipment to start his own service business," Dollar said. "Credit unions have stepped into that under-served gap over the past decade and made a real difference in a lot of communities."
A 2011 SBA-commissioned study, "The Increasing Importance of Credit Unions in Small Business Lending," showed that credit union member business lending increased both before and during the financial crisis while banks' lending decreased, noted Carrie Hunt, senior vice president of government affairs and general counsel at NAFCU.
So, what can CUs do to respond to potential growing competition from commercial banks?
The SBA signed a memorandum of understanding with NAFCU aimed at expanding American entrepreneurs access to small-dollar business loans in late February.
And in early February, the U.S. Small Business Administration and NCUA announced an initiative under which they will encourage both aspiring entrepreneurs and CUs to reach out to each other to expand the accessibility of small-dollar SBA loans to small businesses.
In addition, SBA has also unveiled an online feature on its website called LINC — Leveraging Information and Networks to Access Capital — that will help "match" entrepreneurs with SBA lenders (though credit unions are not involved in the first phase of the product rollout).
"Credit union small business portfolios have performed extremely well over the past decade even with its economic uncertainties, and the banks have noticed — particularly the community banks," Dollar said.
Dollar also said community banks have closely watched CU's success in small business lending and now seek to ride that wave themselves.
But he sees this growing competition as positive.
"Communities thrive when small business has access to the credit it needs to prosper," Dollar noted. "Credit unions have been successfully leading in the small business lending arena for a number of years, and that success is bringing some of the competitors back to small business lending. [T]hat is a good thing."
Joanna Bruno president of J.R. Bruno & Associates, a business lending consultant in San Francisco, said more banks moving into small business lending will not damage CU market share.
"Just because the banks are coming in, there's no reason credit unions should be intimidated," Bruno said. "Access to capital is still a problem, especially for small businesses. Credit unions have a tremendous opportunity to make small business loans of less than $350,000, as many of these loans still aren't being made by banks. Credit unions should take advantage of this niche in the marketplace."
Rudy Pereira, the president and CEO of $1.5 billion Royal Credit Union in Eau Claire, Wis., said that while increased competition presents some challenges in any business venture, it also helps to "sharpen the game" of the participants.
"You have to offer to competitive rates and have a professional team of lenders when there are more players in the game," Pereira said. "But one advantage that credit unions have, I think, is that businessmen know that when the commercial banks were not offering any loans during the financial crisis, we were, and I think they remember that."
Jim Gallagher, president and chief executive of Member Business Solutions, a credit union service organization based in Tallahassee, Fla., said CUs with strong MBL programs will be able to compete against smaller community banks in the arena of small business lending.
But, longer term, he is concerned by possible deeper encroachment by the larger banks. "That's the big unknown," he said. For example, he noted, credit unions cannot compete with such features as a long-term 10- or 15-year fixed rate loan that banks can offer.
Gallagher noted that since credit unions enjoy uniquely close relationships with their memberships — ties that big banks cannot match — their business lending should remain relatively strong in the coming years.
"Credit unions have an edge in that they know their members and their local communities so well," Bruno said. "I would encourage credit unions to reach out to small business owners among their membership and to their communities in general. It's a great way to benefit their members, stimulate their local economies, and increase their own profitability."
In addition, Pereira indicated that commercial banks still have not really entered the small- and mid-sized loan market that credit unions and community banks now dominate. He noted that his credit union, Royal, has a few loans out in the millions of dollars, but the average value is only about $340,000.
Dollar noted that most credit unions are not near their cap, so they enjoy some room to maneuver. "However, having a cap requires them to strategically plan with a cap in place. And some [credit unions] are nearer to it than others," he said.
Gallagher said that based on his experience, the 12.25% cap, which limits the total volume of business loans issued, poses a greater problem for smaller and mid-size credit unions since they have a greater likelihood of reaching such a limit long before a multi-billion-dollar institution can.
"Nearing that cap means that a credit union might have to slow down, or even pull back, on its business lending," he said. "That is also a concern."
But Bruno noted that many credit unions are nowhere near the cap, adding that, with SBA loans, the guaranteed portion of the loan — whether it's 75% or 85% of the loan amount — doesn't count against the 12.25% cap.
"SBA loans mitigate a credit union's risk, and I encourage more credit unions to get into SBA lending," she said.