The Buzz On Small Business Lending
There has been a lot of excitement in the credit union industry as of late about the potential positive impact that proposed legislation on small business lending could have on the industry’s search for new sources of loan growth. According to a recent Wall Street Journal article, Sen. Mark Udall (D-CO) plans to file legislation that would increase to 25% the amount of assets credit unions can lend to small businesses. Currently, small business loans by credit unions are limited to the lesser of 12.25% of assets or 1.75x net worth per CUMAA, enacted in 1998. According to the Credit Union National Association, the higher ceiling could result in an additional $13 billion in small-business loans in the first year alone.
At a time when the credit union industry is searching for sources of loan growth, one would think that this could be a win for all credit unions that are considering small business lending. Like any decision however, there are risks. Here are some questions to consider:
- Do you have the expertise in-house? There are many nuances to underwriting these loans that are unique and require a different level of expertise that most credit unions don’t currently have
- Do you understand the collateral behind the loans and the risks associated with them? Many small business loans are backed by collateral such as property, machinery or receivables that involve different risks from their consumer-secured brethren
- A typical business loan requires much more attention and member contact than a similar consumer loan. Can the credit union afford to take this additional time or divert resources from other areas?
- How does making member business loans serve your existing membership? Is it in line with your strategic vision?
Answering these questions can help boards and managements determine if small business lending is a line of business they want to pursue.
