Delinquency watch: Small business pressures impact members

In an economy where small businesses play a pivotal role, the pressures they face can lead to cascading effects, especially for those affiliated with them.

A recent report from NCUA suggests that while the credit union system remains resilient overall, rising delinquency rates and net charge-offs are areas of concern. Adding depth to this perspective is the financial stress faced by small businesses, which employ nearly half of all employees.

This begs the question: Are credit union members at increased risk of financial hardship due to the struggles of small businesses? And if so, could proactive hardship assistance programs, similar to disaster relief, make a difference?

The unsettling climate for small businesses

Macroeconomic data suggests resilience, but small businesses face real challenges with cash flow management. According to a recent report by Xero, “cash flow issues caused a number of consequences for small business owners, including not being able to pay themselves (45%) and pay bills (22%).”

In addition, “17% were unsure if they could keep the business going.”

Now, let's connect the dots. Many credit union members are either directly involved in small businesses, as proprietors or employees, or indirectly affected through various economic relationships. Together with higher living costs due to inflation, depleted COVID-relief savings, and increased borrowing costs, there’s a storm brewing.

The challenges ahead

NCUA's Second Quarter Credit Union System Performance Data indicated that delinquency rates for federally insured credit unions had increased 31% compared to the previous year.

Specifically, credit card delinquency rates jumped from 107 basis points to 154. In parallel, there was a rise of 24 basis points in the net charge-off ratio year-over-year.

The concern? If small businesses face operational and financial strain, their owners and employees, many of whom are credit union members, may face personal financial hardships.

With constrained or nonexistent paychecks, their ability to meet financial obligations, like loan payments, diminishes. This could be a contributing factor to the escalating delinquency rates and net charge-offs observed by NCUA.

Learning from disaster relief initiatives

Historically, credit unions have been proactive in offering relief during extreme storms or natural disasters. By understanding the stresses on small businesses and their impact on individual members, credit unions can preemptively tackle the risk of increasing delinquencies with:

1. Financial counseling. Offering free financial counseling services can provide members—small business owners and retail borrowers—with tools and knowledge to navigate uncertain economic times. By understanding their financial situation and receiving expert advice, members can make informed decisions.
2. Flexible loan terms. Credit unions could consider offering payment skips, similar to what’s provided for disaster relief, or restructuring loan terms to lower monthly payments. They key to success is automating these programs through an online banking add on and not waiting for members to ask for help, but promoting the programs preemptively.
3. Hardship loans. Specialized short-term loans with low or no interest can provide immediate relief for members facing financial hardships, ensuring they don't fall into the trap of high-interest debt.
4. Educational workshops. Hosting regularly scheduled workshops that educate members about the broader economic landscape, potential risks, and strategies to mitigate them can be invaluable. Knowledge is, after all, the best defense.
5. Stronger communication channels. Ensuring members are aware of the support available is crucial. Emails and text messages have become cluttered with offers and spam. So, in addition to those channels, leverage online banking (most Americans prefer to bank online) and post signage and flyers in branch offices to keep members informed and engaged.

Looking ahead

To deliver on the member-first promise, credit union executives may have to get creative. The current economic landscape, punctuated by the struggles of small businesses, demands a nuanced understanding of the pressures members face.

While the NCUA report shows growth in assets and loans, it also highlights the undercurrents of potential risks. Recognizing these early signs and understanding their origins can help credit unions serve their members when they need it the most.

As the challenges mount, so must the response. Proactive measures, inspired by disaster relief initiatives, could be the lifeline many members need in these uncertain times.

As small businesses and their employees navigate their hardships, credit unions have a golden opportunity to reinforce their commitment to members, ensuring their financial well-being and safeguarding the health of the credit union as a whole.

RUTHANN RIGGS is chief growth officer at Constant, a CUNA Strategic Services alliance provider.