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3 Ways Credit Unions Can Win Big In Member Business Lending

Credit unions can leverage past successes and harness existing strengths to expand into member business lending.

Members have long trusted credit unions to offer a range of products tailored to meet individual needs. As the landscape of financial services evolves, credit unions are increasingly looking at member business lending (MBL) as an avenue for growth. When it comes to picking a primary financial institution, however, studies show that businesses select credit unions only approximately 12% of the time on average.

Credit unions can succeed in member business lending, but it takes the right systems and tools to do it well. It also requires a change in mindset. Too often, credit unions overengineer member business loans, treating them as multimillion-dollar commercial and industrial loans. Without the staff or the experience to make small business loans, the pendulum swings too far and drives the business owner to the bank down the street.

Three key areas, however, can guide credit unions to small business lending success. Those areas are: leveraging existing success in certain products, transferring expertise in consumer credit scores to business lending, and capitalizing on a deep understanding of member — and business owner — needs in the community.

1. Leveraging Success In Existing Products

Credit unions have historically excelled in various consumer financial products, particularly in the realms of auto lending, credit cards, and real estate. These areas of success provide a robust foundation upon which to build a successful member business lending program.

Auto Lending

Credit unions are well known for offering competitive auto loans, often providing better rates and terms than traditional banks. This success is built on strong relationships with members, streamlined loan processes, and an in-depth understanding of the auto market. I know a credit union executive who loves giving truck loans to small businesses. In fact, he refers to loans for contractors to get a Ford F-150 truck as “gateway loans” because they so often lead to the credit union becoming the member business lender of choice. By lending a product they are very familiar with to new business members and applying current auto lending principles to business lending, credit unions can create similarly attractive and efficient loan products for small businesses.

Credit Cards

In the realm of credit cards, credit unions have carved out a niche by offering low-interest rates and favorable terms. Their member-centric approach ensures credit card products are both competitive and user-friendly. Credit unions can mirror this approach in business credit products, such as lines of credit and business credit cards, which can help meet the liquidity needs of small business owners. Again, no need to think in the millions of dollars to give that member business owner a little flexibility in their cash flow.

Commercial Real Estate

Some credit unions have already ventured into commercial real estate lending, demonstrating their capability to handle larger, more complex loans. These institutions can leverage their experience in underwriting, risk assessment, and property appraisal to expand their business lending portfolios. By promoting their expertise in this sector, credit unions can attract more business members seeking financing for commercial properties.

2. Transferring Expertise In Consumer Credit Scores

Credit unions have a long history of successfully using consumer credit scores, which play a critical role in approving loans and credit products in an area where credit unions have clearly dominated. They can seamlessly transfer this expertise to the business lending space.

Understanding Credit Risk

The principles of credit risk management in consumer lending are fundamentally similar to those in member business lending. Credit unions can use their existing knowledge to assess the blended creditworthiness of member business owners and the business, considering factors such as business credit scores, years in business, and exposure. This ability to accurately gauge risk will enable credit unions to make informed lending decisions that balance the needs of business members with the institution’s financial health.

Credit Score Models

Many credit unions already use sophisticated credit score models to evaluate consumer loan applications. They can adapt these models to analyze business credit scores, providing a reliable framework for assessing the risk of business loans. Many of these models are validated to amounts well within the risk appetite of a credit union. By leveraging these models, credit unions can streamline the underwriting process to help provide lines of credit, equipment, and other competitive loan products that meet the needs of small businesses.

3. Understanding Member Needs

According to Equifax research, roughly 21% of all credit union members are also small business owners. One of the greatest strengths of credit unions is their deep understanding of their members’ needs within the community, giving them the ability to help those business owners grow. This understanding extends beyond individual financial products to encompass the broader financial wellbeing of their members. By becoming a trusted advisor for the small business owner, they can start to build out centers of growth for member business lending.

Member-Centric Approach

Credit unions excel in offering member-centric financial services. In a study by the Federal Reserve, the largest factor for a business selecting a credit union was the importance of the relationship (65%) versus the secondary reason, the chances of getting funds, or the tertiary reason, speed of the loan decision. By applying this relationship matters approach to business lending, credit unions can better understand the unique challenges faced by small business owners. This involves more than just evaluating financial statements; it requires listening to the goals and aspirations of business members and offering tailored financial solutions that support their growth.

Community Engagement

Credit unions are deeply embedded in their communities and are committed to the economic development of their member base. This community-focused approach can be a significant advantage in business lending. By supporting local businesses, credit unions not only help individual members but also contribute to the overall economic health of the community. This creates a positive feedback loop, where thriving businesses lead to more prosperous communities, which in turn supports the growth of the credit union.

Parting Thoughts

Credit unions have a unique opportunity to expand into member business lending by leveraging their existing strengths in product offerings, credit score expertise, and member relationships. By building on these foundations, credit unions can create successful member business lending programs that meet the needs of their business members while maintaining their commitment to personalized, member-centric service. As credit unions continue to evolve and innovate, they can play a crucial role in supporting the growth and success of small businesses within their communities by tapping into those fundamentals from past success.

 

Mike Horrocks, SVP, Baker Hill
Mike Horrocks, SVP, Baker Hill

Mike Horrocks is a senior vice president at Baker Hill. He is responsible for new product innovation and partnerships and all go-to-market activities related to Baker Hill solutions. Horrocks is a recognized authority throughout the entire spectrum of project management, professional services management, corporate finance, wholesale and retail banking, information management, and management consulting.

Baker Hill empowers financial institutions to generate growth, increase profitability, mitigate risk, and strengthen customer relationships using a single unified platform. It delivers the industry’s expert cloud-based solution for commercial, small business, and consumer lending, portfolio risk management, CECL and analytics and marketing.

This article is sponsored by a recognized solutions provider in the credit union industry. Callahan & Associates does not endorse vendors or the solutions they offer, and the views and opinions offered here might not reflect those of Callahan. If you are interested in contributing an article on CreditUnions.com, please contact the Callahan team at ads@creditunions.com or 1-800-446-7453.
February 3, 2025
CreditUnions.com
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