“I tried all of the big banks, literally all of them, and was shocked and surprised that I got turned down,” said McCarthy, who purchased four Baskin Robbins stores in his area this spring with a $300,000 loan from Mountain America Credit Union in Salt Lake City, Utah. “The big banks didn’t want to lend a little money; they wanted to lend a lot of money.”
Commercial bank loans of less than $1 million have fallen by more than 14 percent compared with 2008 levels, according to Federal Deposit Insurance Corp data.
Meanwhile, credit union business lending jumped 22 percent from 2008 through the end of 2011 to $39.1 billion, according to the National Credit Union Administration, which regulates credit unions.
Nevertheless, business loans represent only 4 percent of total credit union assets of roughly $1 trillion through March, and many credit unions would like to do more.
But some individual credit unions cannot — they are nearing their legal limit. A 1998 cap restricts credit unions from lending more than 12.25 percent of their
Credit unions have lobbied for more than a year to get Congress to raise the lid, but opposition from the banking industry has stalled proposed legislation. Credit unions are now focusing on legislation introduced this spring by U.S. Sen. Mark Udall, a Colorado Democrat, that would increase the lid to 27.5 percent of assets and has a better chance of passing. Senate Democratic leader Harry Reid has said the Senate would vote on a bill this session in what is expected to be a very close decision.
The American Bankers Association and others have lobbied against the change. The ABA says credit unions lack the institutional resources needed to do more commercial lending. Additionally, the tax-free status of credit unions gives them an unfair competitive advantage over banks. Credit unions operate as democratically controlled cooperative institutions, serving only their members, on a not-for-profit basis.
“Credit unions have a mission identified by Congress to serve people, primarily consumers, especially those of modest means,” said Keith Leggett, an economist with the ABA. “Expansion of the cap would represent a fundamental shift or change in the credit union charter.”
Leggett concedes the recession and weak economy have hurt the balance sheet of many small businesses, making it difficult for some to borrow from banks. Current lower interest rates have added to the challenge of banks’ ability to make small business loans, he said.
“However, we’re in a relationship business that goes beyond just a loan to other products,” Leggett said, adding, “banks are making loans to every credit-worthy customer they can find.”
While several credit unions suffered significant losses from bad business loans in recent years, Debbie Matz, chairman of the National Credit Union Administration, calls the cap “arbitrary.”
“Credit unions tend to make very small business loans,” she said. “Generally banks don’t even make a loan that small,” she said, noting the average credit union business loan is about $230,000. “They’re filling a very important need to for small businesses.”
Those charged with finding new sources of capital for small businesses say anything that creates more financing options cannot be bad.
“I strongly believe that if credit unions are given a little bit more leeway, the overall small business lending environment in the country will improve,
directly and indirectly,” said Rohit Arora, CEO of Biz2Credit, an online service that has helped McCarthy and other small business owners arrange financing from a variety of sources.
Not every credit union is active in small business lending. In fact, only about one-third of federally insured credit unions have commercial lending programs,
according to NCUA data from the end of 2011. Many offer loans backed by the Small Business Administration. Business owners seeking commercial loans should inquire whether a program is offered at their local credit union.
“In certain instances I think it is easier to get loans from a credit union as opposed to a bank,” said Steven Parker, the co-owner of an upscale dog boarding business, K-9 Resorts Daycare & Luxury Hotel in Fanwood, New Jersey.
Parker and his brother secured a credit union loan of $180,000 from Financial Resources Federal Credit Union in 2010 for working capital. They are now scouting out credit unions that can help finance new operators interested in franchising their business.