Not-So-Risky Business Lending

A credit union can meet the need of small business owners in its membership without creating undue risk in its loan portfolio.

The cooperative financial industry has posted strong annual MBL growth in recent years, including the 13.1% annual increase achieved in second quarter 2014. This tops the respective 8.4% growth achieved by all banks in the United States over the same timeframe. However, credit unions nearly $43.6 billion in MBL balances held at midyear is just a drop in the bucket compared to the nearly $1.4 trillion held by banks.

In an effort to land business business, it can be all too easy to glaze over the needs of entrepreneurs, small businesses, and similar borrower groups. In fact, according to data from the Institute for Local Self Reliance, bank lending to small businesses fell 14% from 2000 to 2012 and microlending dropped 33% during the same time frame.

There’s a large opportunity out there for small, new, and niche business credit. And even though these businesses face a higher rate of failure than their established counterparts, there are a number of resources whose business models revolve around providing assistance that make serving these businesses easier and safer. And that’s what we’re focusing on this week on

Business incubators like those tracked by the National Business Incubation Association are growing in prevalence thanks in part to their ability to leverage community-oriented partners like credit unions to expand their reach. And the benefits of those alliances go both ways. Incubators offer credit unions access to new MBL opportunities, markets, and technologies. They also allow credit unions to assume a consultative role in the functioning of their local economies. Learn more about incubator partnerships in You Can Do It, They Can Help.

In Durham, NC, Self-Help Credit Union relies on the Self-Help Ventures Fund to make microloans, SBA CDC/504 loans, community development loans, and technical assistance loans. The fund is capitalized through loans and grants from various government, business, and religious organization sources rather than member deposits. Learn more about the fund and the lending strategy of Self-Help, in this week’s Q&A with David Beck, director of policy and media at Self-Help, and Tracy Ward, chief commercial lending underwriter.

Further north, Ontario’s Northern Credit Union which has roughly $1 billion in assets and approximately 55,000 members uses crowdfunding to serve needs that exist beyond what the financial cooperative can accomplish through its own direct business lending. But even stateside, crowdfunding is becoming a mainstream alternative to traditional lending channels, and credit unions have plenty of lessons to learn from the practice of aggregating dollars in support of a shared goal. Learn more in Many Hands Make Fundraising Easy.

Many hands make light work, which is exactly why Veridian Credit Union invests in capital funding networks that decrease the dollar amount at risk for lenders while also meeting the needs of deserving borrowers. The Iowa cooperative is not afraid of exploring options that benefit the local economy as much as they do the cooperative. For example, it has a thriving MBL line as well as a CUSO that allows it to make direct investments in other credit union-owned companies. It also participates directly in three Iowa-focused venture capital firms. Learn about Veridian’s approach in Divide The Risk, Multiply The Impact.

As the credit unions and organizations profiled this week go to show, smaller loans might offer a lower rate of return, but in aggregate, they can make for a steady and profitable line of business.

Happy reading.

December 8, 2014

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