Credit unions are jockeying to become lenders of choice to America’s small businesses.
Problem is: Banks aren’t willing to cede territory that has traditionally belonged to them.
The bitter rivalry is now playing out in Congress as lobbyists push to increase the federal limit on credit unions’ business lending from 12.25 percent of total assets to 27.5 percent. Naturally, bankers oppose the change.
The conflict has implications for local business owners. With credit unions and banks competing for their business, local companies might stand a better chance of locking in a loan at an attractive interest rate.
Since December 2007, the beginning of the recession, credit union lending to businesses has increased by 39 percent nationally and 50 percent in Indiana, according to the Indiana Credit Union League.
More than 50 Indiana credit unions offer business loans. The decision whether to wade into those waters is made by members of each non-profit cooperative organization. The majority of credit union loans are for members’ homes and cars.
In dollar terms, Indiana credit unions have made $1.5 billion in business loans, representing 13 percent of all credit union lending in the state, said John McKenzie, the Indianapolis organization’s president.
“Businesses more and more are looking to credit unions for business loans,” he said.
If legislators increase the limit on credit unions’ business lending, the change would raise Indiana credit union lending capacity by $364 million in the first year of the phased-in increase, McKenzie said.
If businesses borrowed that full amount from credit unions, the additional capital could be used to create more than 4,000 jobs, based on a stimulus spending formula created by the federal government, McKenzie said.
He sees raising the lending limit on credit unions as a way to increase jobs and help business owners without adding to the federal deficit by creating more stimulus programs.
“The businesses just need access to credit,” McKenzie said.
Jeff Meyer, CEO of Three Rivers Federal Credit Union, said his organization ventured into business services 12 or 13 years ago because officials noticed that some members were conducting small business transactions using personal accounts.
The credit union was founded to provide financial services to workers at the former International Harvester Co., a manufacturer that cut thousands of Fort Wayne jobs in the early 1980s. Some of those displaced workers rebounded by starting small businesses, Meyer said.
The Fort Wayne credit union now has nine employees – out of 225 – devoted exclusively to business services. More than 1,000 companies do business with Three Rivers, which has more than 65,000 individual members.
“It’s just an extension of what we try and do to present quality services to the community,” Meyer said.
Because of the credit union’s size – almost $700 million in assets – it can’t make loans of more than $2 million or $3 million without taking on a partner to provide part of the cash, Meyer said. The limit helps the financial institution diversify risk, but it also forces the credit union to turn down some creditworthy loan applicants, he said.
“It’s apparent there is a need out there for these kinds of services,” he said.
Bank lending down
S. Joe DeHaven couldn’t disagree more. The president and CEO of the Indiana Bankers Association doesn’t think credit unions should make business loans.
“Credit unions were created to help people of modest means,” he said. “Do you think business lending is in line with that mission? I don’t.”
The only two ways credit unions can make business loans is by lending to applicants who aren’t creditworthy or by stealing customers from banks, DeHaven said.
If banks have rejected the loan applicants, then credit unions are taking a considerable risk by approving them, he said.
“If they’re doing that, there’s going to be a day of reckoning,” DeHaven said.
Credit union leaders say that’s not happening.
McKenzie, of the Indiana Credit Union League, said usual lending standards apply when his members lend to businesses. The goal is to make good loans that get paid back, he said. Businesses applying for credit union loans are solid borrowers.
“In many cases, they’re just looking for a better deal” than banks offer, he said.
Bank lending to businesses decreased nationally by more than 14 percent from Dec. 31, 2007, to March 31, according to numbers from the Indiana Chamber of Commerce. During that same period, business loans by credit unions increased by almost 12 percent.
Even so, credit unions’ total business lending as of March 31 was less than 2 percent of the bank total: $14.8 billion compared to $1.04 trillion, according to the Chamber.
McKenzie said many factors have played into the decrease of bank lending.
But DeHaven cited only two reasons. Loan demand is down because some prudent business owners are waiting to expand amid economic uncertainty, he said. Meanwhile, some business loan applicants aren’t a solid risk because the real estate they want to use as collateral for loans isn’t worth as much as it used to be, he said.
“Very aggressive and critical” bank examiners are forcing banks to take losses on outstanding loans backed by devalued properties, DeHaven said. Lenders are carefully reviewing all new deals to avoid such situations, he said.
Bottom line: Like credit unions, banks need to lend to make a profit. If applicants are creditworthy, bankers will approve the loans, he said.
DeHaven hears from bank members of all sizes in all parts of Indiana that say they’re struggling to find good-quality borrowers.
“That doesn’t sound to me like a lack of supply,” he said. “That sounds like a lack of demand.”
Credit unions argue the lack of demand is for bank loans, which can carry higher interest rates. Bankers blame it on an uneven playing field.
DeHaven, like all bank advocates, is quick to note that banks pay federal income taxes, but credit unions don’t. That added obligation supports the national economy but increases banks’ costs, he said.
McKenzie, the state credit union spokesman, agreed that lower tax requirements allow credit unions to charge lower interest rates on loans.
A borrower’s view
Even so, many local businesses don’t think of credit unions as lenders.
Brad Springer, the fourth generation to work in family-owned Springer Jewelers, said the owners’ impulse would be to approach bankers if they needed money.
Credit union lending to businesses, he said, “is not top of mind.”
The 80-year-old retail company, founded in the midst of the Great Depression, initially struggled to establish itself as creditworthy.
Credit was crazy tight in 1931, but Edward Springer was determined to open his own business. It would be better, he figured, than accepting a pay cut from his boss, the owner of a small Fort Wayne jewelry store.
Unable to qualify for a startup loan, Springer borrowed inventory from a jewelry wholesaler he’d worked with. The hush-hush deal – not to be leaked to the salesman’s supervisor – provided the leeway that Springer Jewelers needed to get started. After he sold all the baubles, Springer was able to pay for them, establishing a credit history.
The business, at 7123 W. Jefferson Blvd., now pays upfront for inventory, relying on profits rather than a line of credit. But things can change, co-owner David Springer said. If the business needs to borrow in the future, he’d consider a credit union.
“Money is money,” he said. “It’s all about how much will somebody charge to lend it.”
