The Credit Union Experience – Only for Some?

The Credit Union National Association found that 90 million American individuals enjoyed $7 billion in direct financial benefits from credit unions during the year ending June 2010.  These benefits came as lower loan rates, higher deposit interest, and lower fees than in offered by bank institutions.  Equally valuable, credit unions members experienced the sense of ownership and respect that comes from dealing with real neighbors.  The pace may be less frantic than at a bank, but they get more done.  American small businesses deserve that same careful treatment, but for too many it’s unavailable.

Many small businesses that sought loans have been rejected by banks.  During the banks’ latest financial crisis, credit union loans to small businesses increased by 45%, but bank loans to small business dropped by 15%, and 60% of small business loan applications were denied during 2010.

Banks still control 95% of the business loan market – 19 times as much as credit unions, and community banks control 58% of the small business loan market — 12 times as much as credit unions.  The banks’ claim of any credit union “threat” is risible.

Some credit unions have decades of successful experience in managing business loans.  They have the staff, the monitoring systems and cash management tools that help borrowers.  Credit unions are better at underwriting business loans than are banks.  In 2010, credit unions experienced annual business loan losses of 0.65% compared with the 1.83% experienced by banks.  Banks were 3 times riskier.

A bill in the Senate, S.2231, would improve small business access to capital by allowing credit unions to increase loans.  The bill would raise the cap on small business lending from today’s 12.25% to 27.5% (percent of assets) and codify the staffing, controls and safeguards that successful credit unions have used.  Because today’s low cap means credit unions with less than $50 million in assets cannot justify the staffing and safeguards expense of offering business loans, the bill would make it possible for more small businesses to get loans.

In November 2011, small business loan demand peaked at a 4 year high.  But, the National Federation of Independent Businesses says loan demand is low for the second quarter of 2012.  Getting more reliable sources for small business loans makes sense for the long run.  Businesses will eventually want to make capital outlays and to hire more workers – $13 billion by one estimate – which would encourage economic growth and create over 140,000 jobs.

S.2231 can authorize credit unions to be ready with the right kind of help.

Alan Daley is a retired small businessman who writes for the American Consumer Institute

 

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