CUs, Entrepreneurs a ‘Perfect Fit’
Establishing relationships is crucial when lending to small businesses.
With their cooperative business structure, credit unions are perfectly positioned to help entrepreneurs—a population often overlooked by big banks—realize their business dreams.
“There’s always that burning desire of U.S. citizens,” says Dana Sumner, co-founder of Development Finance Training and Consulting Inc. and an instructor at CUNA’s Business Lending Certification Institute. "They want to own their own business, and they feel much more confident taking that next step during positive economic times when the economy isn’t suffering like it has been the past couple of years.”
As the economy recovered, there has been a greater demand from consumers seeking the financial means to start or expand their businesses. Sumner says there are new opportunities—and challenges—ahead for credit unions when it comes to business lending.
Banks traditionally have felt more comfortable dealing with larger businesses, leaving a void for those entrepreneurs who need funding. Due to the cooperative model they operate under, credit unions are a “perfect fit” for lending to entrepreneurs.
That’s because loans are more than transactions; they’re about establishing relationships, Sumner says.
“When you look at the cooperative model of the credit union, it is [designed] to help the member,” Sumner says. “It’s about getting them the opportunity to grow their small business, which helps the community.”
But credit unions are entering uncharted waters with some lending opportunities.
While credit unions are comfortable lending to businesses in the areas of commercial or real estate, Sumner said other areas, such as manufacturing, service-orientated businesses, or technology, are ones where credit unions don’t have as much experience.
“The biggest concern is a lack of understanding of some of the unique components of the business world,” Sumner says. “We look at manufacturing. That’s not an area that a lot of credit unions get into, so they have some concerns and specific issues.”
While the opportunities for business lending are expanding, what hasn’t changed is what lenders take into account when reviewing an applicant’s request for financing.
Two areas that are taken into account are an applicant’s character and the conditions under which the request is made, says Joe Hyatt, chief credit officer at Development Finance Training and Consulting Inc. and an instructor at CUNA’s Business Lending Certification Institute.
“You either have character or you are one,” says Hyatt. “You typically don’t want to lend to the latter.”
Hyatt says lenders also need to look at the conditions surrounding the loan application, such as the political climate and economy, or industry-specific factors such as suppliers, connections, and influencers.
“Those are things that impact and create a good borrowing situation, a good strong borrower, and a good loan for the credit union,” Hyatt says.