For entrepreneurs and small businesses, the journey from startup to thriving establishment is full of peril, particularly when it comes to securing the capital so essential for growth.
According to the Small Business Borrowers Poll conducted last year by the Federal Reserve Bank of New York, 37% of small businesses across a four-state region all listed credit availability as one of their top challenges.
In fact, less than half of those businesses that applied for a loan last year were approved. Among those that did not apply, one in four refrained because they did not believe there was any chance they would qualify for financing.
The need is clear. But given the high failure rates that often accompany startups, many financial institutions question whether they can successfully lend to these businesses without exposing themselves to undue risk.
So it may come as a surprise that one New York credit union has actually increased its total annual member business lending at a growth rate roughly five times that of its comparable peers (25.5% versus 4.6%), while simultaneously experiencing dropping delinquency rates across the board.
Lower East Side People’s Federal Credit Union ($37.9M, New York, NY) formed more than a quarter century ago when the last commercial bank in an underserved area of the city closed shop. Over the past decade, the cooperative evolved and diversified its service offerings, particularly for small businesses.
Today, LES People’s focuses its business lending predominantly on local, established businesses, says Angel Garcia, the credit union’s business development specialist. However, its portfolio does include about a 10% mix of loans and lines of credit issued to fledgling entrepreneurs and startups, which the credit union defines as those existing for less than two years.
High, Low, And Everything In Between
“Our small business loans typically average around $48,000, with a minimum limit of $500 and a ceiling of $250,000,” Garcia says.
Although Garcia is primarily responsible for generating, packaging, and underwriting these loans, loan policy requires that others in the credit union’s staff and leadership be involved, particularly for high-dollar loans and exceptions to standard policy. This includes the credit union’s business loan officer, who also oversees its commercial and multifamily housing efforts, and its lending manager.
In addition, the CEO signs off on loans up to $100,000, and any amounts over that limit also require the approval of LES People’s credit committee. As another way to mitigate risk, the cooperative secures more than 90% of its business loans through the Small Business Association’s 7A Express program.
Larger dollar loans can certainly mean bigger opportunities, but the credit union doesn’t overlook the other end of the spectrum either.
“When it comes to loans for startups, the recession did make us rethink some of our policies,” Garcia says. But in the right circumstances, LES People’s will still fund these startup businesses, provided the borrower meets these criteria:
A reasonable amount of cash, typically equal to a third of the business’s total financial need
Proven experience and solid planning for a successful endeavor.
Connecting Through Nontraditional Opportunities
To generate a steady pipeline of new business, Garcia frequently attends small business workshops and seminars — both for networking and to teach budding entrepreneurs best practices for successfully obtaining a loan.
“For those businesses that are just starting out, we can walk them through the basic steps and explain what our thinking is as a lender,” Garcia says. “Sometimes that’s as simple as handing out worksheets that help owners understand their personal debt burden and determine whether they have operating profits greater than the amount of money they’ll need to pay on a loan.”
These discussions with entrepreneurs also allow LES People’s to provide an outsider’s perspective on the viability of the borrower’s business model.
“We want to make sure they are not competing directly with a large national retail chain or someone else who can generate millions in sales,” Garcia says. “And if there’s something unique about them or the services they provide, we want to help draw that out.”
Because these businesses are operating in a region where real estate packs a serious sticker shock punch, securing and paying for that space is another point of concern.
“If you’re making a large monthly fixed payment to the landlord, it’s like having another loan, so we always factor that into what the borrower is actually capable of handling,” Garcia says.
The credit union has also funded some unique alternative business models such as food trucks, equipment for home-based operations and offices, and businesses with shared distribution channels or sales space that allow individuals to keep their overhead low.
What Goes Around Comes Around
In cases where the risk is just too high or the business plan too raw, LES People’s typically refers individuals to one of the many free small business development and technical assistance centers nearby.
In return, these organizations send more prepared, business-savvy clients that are ready for financing back to the credit union.
LES People’s also has ties with several universities, including Pace and Columbia, whose small business centers provide a feeder for well-equipped individuals looking to make their big idea a reality.
“These outside referrals are important to us because even though we are headquartered in the Lower East Side, we can actually lend throughout the five boroughs as long as the business owner has a personal annual income under $38,000,” Garcia says.