A Perfect Union
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Since moving his business to Utah from his native Australia in 1994, entrepreneur Ross Johnson has been a frequent customer of credit unions. Indeed, Johnson-creator of an extra-bright portable lighting tower used at the Salt Lake City Winter Olympic Games-has tapped credit unions for everything from buying commercial property to funding working capital for his growing venture, Mobilight Inc. So when rapid growth forced Johnson, 49, to build a larger manufacturing and warehouse facility for his $3.2 million business, a credit union was the natural financing choice.
A frustrating experience with a large regional bank a few years ago only reinforced Johnson's financing decision. The bank had an impressive product line and specialized in commercial lending, but its lack of personal service left Johnson cold. It was a different story altogether with Mountain America Credit Union, which, in the past couple of years, has loaned Johnson money to refinance a commercial building and buy a truck for his business. The credit union is now helping finance the construction of a $2 million, 24,000-square-foot facility. "The personal relationship we have with [Mountain America] is really what made it happen," Johnson says.
Another bonus of working with a credit union: As nonprofit organizations, they can generally charge less for loans because they don't pay income taxes or shareholder dividends. What's more, they are often willing to make loans many banks won't-credits of $500,000 and under. Nonetheless, it was simply the old-fashioned service that attracted Johnson.
"I don't make appointments, and they handle it," he says. "I can walk in and visit with them and come up with ideas. We know each other very well; it's all about the personal relationship."
Though commercial lending was once unfamiliar territory for most credit unions, a more favorable regulatory climate is spurring credit unions to establish business lending units to attract commercial borrowers like Johnson. "Some credit unions are shifting in a major way to business lending," says David Ely, professor of finance at San Diego State University. "The potential is much greater now that many [credit unions] are converting to community charters," which allow them to serve businesses within a geographic area rather than restricting membership to a specific industry or company.
And though credit unions have traditionally had more limitations on business lending than their bank counterparts, recent regulatory developments are easing some of the restrictions. For starters, the SBA has relaxed its limits on credit unions' participation in its flagship 7(a) lending program. Credit unions, which were largely barred from making 7(a) loans until 2003, made 1,172 loans worth $123 million in fiscal year 2005, according to the National Credit Union Administration. In fact, Johnson's loan to build his new commercial facility is an SBA loan for $1.8 million. His lender is part of a commercial-lending consortium, Member Business Lending LLC, that makes about a third of all SBA loans in Utah, according to Kent Moon, its president and CEO.
Additionally, Export-Import Bank, which helps finance the export of U.S. goods and services to international markets, signed a "memorandum of cooperative support" with the NCUA to identify credit unions best suited to provide export financing. The agreement, according to bank chairman and president James Lambright, will "enable us to reach out to more small businesses than we've ever had the ability to reach before."
Meanwhile, proposed legislation in Congress would increase credit unions' business lending authority from the current cap of 12.25 percent to 20 percent of total assets and exclude all business loans of less than $100,000 from the cap, up from $50,000. The rule change would likely boost their business lending capacity significantly, according to Ely. "If you look at the average loan size, many of the credit unions would have average loan balances that fall below $100,000," Ely notes. "There would be quite a few loans they're making now that would not count against this cap for them."
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Overall, more than 1,700, or nearly 20 percent, of the 10,000 credit unions in the U.S. are active business lenders, according to the NCUA. "But a lot of those credit unions are involved in a very small way and only have a couple of [business] loans," Ely says. For instance, rather than extending commercial lines of credit, some credit unions are more comfortable making business loans to acquire rental property or vehicles because those areas are similar to their other areas of expertise, he adds.
And unlike bank lenders, many credit unions simply don't advertise, making them less visible to commercial borrowers. If you aren't already acquainted with credit unions in your area, you can get assistance from the industry's trade organization, Credit Union National Association, which maintains an online database of credit unions that allows you to search within a 10-mile radius. A good rule of thumb: A credit union with $100 million to $500 million in assets is more likely to be an experienced commercial lender, says Ely.
Unlike banks, credit unions tend to be "relationship lenders," meaning they take into account a host of factors when reviewing a loan request, not just financial data. "Relationship lending [is] based more on intangible factors, [such as] a loan officer visiting the company and getting to know the owners and the managers, talking to suppliers and customers, and getting a sense of the business and the liabilities of the business that way, as opposed to using hard data," Ely says. "Relationship lending is a niche [that credit unions fill]."
Crystal Detamore-Rodman is a Charlottesville, Virginia, writer who covers the small-business finance market.