Secrets of Growth

Small biz loans: Credit unions to the rescue?

December 2, 2011: 10:10 AM ET

Spying an opening amid a credit crunch for many small companies, credit unions are expanding their offerings to entrepreneurs facing rebuffs from banks.

By Elaine Pofeldt, contributor

FORTUNE -- When Arif Yousuf applied to JP Morgan Chase for a $50,000 loan to grow his New York City IT services firm, SoftNet Technologies, he filled out a complex application form, says he waited around six months for a decision, and then got turned away. That was in 2007. Last summer he applied again, and, once more, was rejected.

Disappointed, Yousuf turned to Brooklyn Cooperative Federal Credit Union in New York. Though he already had a $50,000 loan that he was paying down to JP Morgan Chase (JPM), the credit union issued him a new $50,000 loan, guaranteed by the U.S. Small Business administration, within one month of his application. "I felt when I was talking with them, they were standing in my shoes," says Yousuf, who founded his company, which includes him and three contractors, in 2003.

The loan wasn't as cheap as his previous bank loan, however. The credit union loan has an interest rate of nearly 9%, compared to the 4.99% he got from Chase on his other loan, he says.

A spokesman for Chase, JP Morgan's commercial lending unit, declined to comment on Yousuf's individual case, citing privacy concerns. However, the spokesman noted that the bank's lending to businesses with sales under $20 million is on the rise. "In the first three quarters of 2011, we loaned $12.6 billion to 300,000 small businesses," he said. "That's up 71% from a year ago."

See also: Meet the small biz loan matchmakers

Nonetheless, Yousuf isn't the only one finding that credit unions are increasingly welcoming small business loans these days. Spying an opportunity to increase market share during what continues to be a credit crunch for many small firms, some credit unions -- particularly strong ones in major metropolitan areas -- are expanding their offerings for entrepreneurs.

The number of credit unions reporting that they gave out business loans reached 2,248 in 2010 -- or 30% of all credit unions -- up from 780 in 1986, according to an SBA report released in September. And, according to the National Association of Federal Credit Unions (NAFCU), credit unions increased business lending by 4.5% in the 12 months ending in June 2011, while bank lending declined by 1.8% in the same period.

"Credit unions are starting to be more aggressive in getting small businesses to bank with them and to lend them money," says Rohit Arora, founder and CEO of online loan broker Biz2Credit, who introduced Yousuf to Brooklyn Cooperative. The approximately 70 credit unions in Biz2Credit's network approved 56.6% of loan applications in October, compared to 9.3% by big banks during that same month.

Credit unions may be able to capture more of the market if NAFCU and other credit union advocates succeed in persuading Congress to pass the Small Business Lending Enhancement Act, introduced in the House and Senate this past spring. Currently, credit unions that meet certain criteria -- such as being well capitalized and experienced in business lending -- are allowed to lend up to 12.5% of their assets or 1.8% of their net worth to businesses. Under the proposed law, these customer-owned and managed financial cooperatives would be able to lend up to 27.5% of their total assets to businesses. That could have a major impact on businesses seeking the kind of small loans that are especially hard to get from big banks right now. Credit unions tend to focus on loans in the $1 million and under range, according to the NAFCU.

"If credit unions were to step up lending, it would give funding to small businesses that probably need it the most," says Josh Peirez, who is a president at Dun & Bradstreet.

See also: A bright spot for small businesses: Job creation

To be sure, credit unions have a long way to go before they fill banks' shoes. Currently, credit unions make only 1.3% of all business loans in the U.S., compared to 90.2% by banks and 8.5% by thrifts, according to the NAFCU's data. And there's been strong opposition to the lifting of the cap on credit union lending by banks, which claim that credit unions have unfair tax advantages and that they are not prepared for the risks of increased lending.

Fred Becker, president of the NAFCU, points to data that shows that credit unions have lower delinquency rates than banks on business loans. "They tend to be more conservative, with knowledge of their members and their members track records," he says.

Meanwhile, some credit unions aren't waiting to step up their outreach to small business customers. Take Bellco, a Colorado-based credit union with about $2 billion in assets. Founded in 1936 by employees of the Mountain States Telephone and Telegraph Company who wanted to protect themselves from the financial instability of the times, Bellco entered the small business market in 2006. The credit union now offers small business owners services such as checking accounts, credit cards, online banking, unsecured lines of credit in the $5,000 to $10,000 range and vehicle loans up to $75,000, says John Ruby, senior vice president of lending.

While most of Bellco's small business loans are in the $5,000 range, it has begun making larger loans as larger businesses, with 50 to 100 employees, have come on board over the past two years. "People are realizing we're sophisticated financial institutions," Ruby says.

In 2011, Bellco made $62 million worth of business loans secured by commercial real estate -- up from about $30 million in 2010, Ruby says. On these loans -- averaging about $1 million -- interest rates are typically in the 5% to 6% range.

Amplify Federal Credit Union, a not for profit financial cooperative located in entrepreneurial hotspot Austin, Texas, has also accelerated small business lending, luring the small business crowd with gatherings such as "Morning Mingle" and "Learn @ Lunch" events and café-style branches with free WiFi. With $565 million in assets, it expects to end 2011 with $16 million in small business loans, up from $5.5 million in 2009, with most of the loans secured by real estate, according to Kendall Garrison, senior vice president of lending. "We think this is a place where we can conserve our community," says Garrison. "That's what credit unions are all about."

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